Central bankers’ crypto experiments should put investors on alert

Banks’ digital currencies could displace the rationale for private sector projects

Gillian Tett

    © Daniel Pudles


This year, bitcoin has mesmerised many investors. 

Never mind the fact that it has doubled in price, after tripling in 2020; nor that figures such as Elon Musk have backed it — this week he tweeted that Tesla cars will be sold in bitcoin. 

What is even more remarkable is that some establishment players such as Citigroup now think bitcoin “may be optimally positioned to become the preferred global currency for trade” in the future, a role currently occupied by the dollar.

But while this is headline-grabbing, there is a second crypto tale unfolding that most people have noticed less: central bank experiments. 

This week the Bank for International Settlements held an “innovation” conference, at which Jay Powell, Federal Reserve chair, explained that Fed officials are working with the Massachusetts Institute of Technology to explore the feasibility of a dollar-based central bank digital currency. 

Details are sparse. 

But a CBDC essentially enables consumers to use computerised code as “money”, thus echoing some of the features of bitcoin, or the type of crypto coin being developed by Facebook. 

But this computer code would be created and controlled by the Fed — not Facebook or faceless bitcoin “miners”. 

Powell stressed this digital dollar would not emerge quickly, if at all, saying “there is no need to rush”. 

But the symbolism is striking, since it reflects a subtle but notable shift in attitude among regulators.

When bitcoin and other fintech innovations first emerged this century, many central bankers either dismissed or derided them in conversations with me. 

They remain so: Powell suggested this week that bitcoin was primarily a speculative investment substitute for gold, not for the dollar; Agustín Carstens, BIS head, warned it was mostly used for regulatory arbitrage.

But what central bankers are belatedly realising is that the reason such innovations have emerged is that entrepreneurs are responding to two big flaws in modern finance. 

One revolves around something that central bankers seem unwilling or unable to address: the risk that fiat currency is debased in the future by excessive supply, ie quantitative easing. 

The other is something central bankers do want to address: the clunky nature of the modern payments system. 

As Powell recently observed: “The Covid crisis has brought into even sharper focus the need to address the limitations of our current arrangements for cross-border payments.”

Thus, what the Fed and others are now trying to do is a mild version of the “if you can’t beat ’em, join ’em” strategy: instead of ignoring bitcoin or Facebook’s experiments, they hope instead to harness some of the ideas behind such innovations as blockchain ledgers on their own terms. 

Or, if you like, out-crypto the crypto kids.

Will it work? 

There are reasons to be sceptical. 

One problem is style: asking stodgy central bankers to embrace the type of freewheeling creativity found in fintech is like asking grandpa to listen to rap. 

Another, even more daunting, issue is that CBDCs create huge policy headaches, such as the future role of private sector banks.

Commercial banks currently earn fees by “creating” money for consumers, (loans), by using money supplied (or created) by a central bank. 

A CBDC, however, would give consumers money (digitised tokens) inscribed on the computing ledgers of central banks. 

This could potentially disintermediate banks in a way that would shatter revenues, as Jens Weidmann, head of the Bundesbank, told the BIS. 

He suggests that if the eurozone creates CBDCs, it might need to retain a two-tier distribution system to keep banks involved.

Then there are data, privacy and liability issues. 

Central banks might not want to hold consumer data on their ledgers. 

Investors might hate losing the anonymity associated with cash.

A possible solution is that CBDCs could coexist with cash, which is what Powell expects to see. 

But the logistics and legal framework for this could be daunting, not least because a recent BIS survey suggests that only a quarter of the world’s central banks have clear legal authority to create such a currency.

Yet it would be wrong to assume nothing will happen, just because the logistics look daunting. 

The same BIS survey suggests that 60 per cent of central banks are considering CBDCs and 14 per cent are carrying out pilot tests. 

“The Covid-19 pandemic has added new motivations to this journey,” it notes. 

“While most [central banks] have no plans to issue CBDCs in the foreseeable future, central banks collectively representing a fifth of the world's population are likely to launch retail CBDCs in the next three years.”

The Bahamas is one example: it already has a CBDC, called the sand dollar. 

More significantly, China is now racing to create a digital renminbi, sparking US angst about competitive threats to the dollar.

Which might explain why the Fed has suddenly teamed up with MIT.

This may not be as thrilling as a Musk tweet. 

But the key point is that if such initiatives eventually fly, they could displace some of the rationale for private sector crypto projects. 

The would-be disintermediators of fiat currency might thus be disintermediated themselves. If so, that would be distinctly ironic. 

Bitcoin investors should watch Beijing — and Boston.

Fighting the P.1 variant

Brazil’s mismanagement of covid-19 threatens the world

Jair Bolsonaro has a lot to answer for



Sérgio olímpio gomes, better known as Major Olímpio, was a policeman who entered politics 15 years ago. In 2018 he managed the campaign in the state of São Paulo of Brazil’s current president, Jair Bolsonaro, and was elected to the national Senate. 

On March 18th this year he died of covid-19, aged 58. He is the third sitting senator to have died from the disease. Nearly 4% of the legislature’s upper house has perished in the pandemic.

That has brought home to the political class a shock that millions of Brazilians are now experiencing. 

The country is suffering a second covid wave far worse than the first. 

Its recorded death toll, averaging over 2,300 a day, is a quarter of the world’s total. 

This is despite the fact that Brazil has less than 3% of the world’s people.

The health system is in a state of “collapse” for patients with severe cases of covid-19, says a bulletin published on March 23rd by Fiocruz, a public-sector research institute. 

In 25 of the 27 states more than 80% of intensive-care beds are occupied. 

Eighteen states have shortages of drugs such as neuromuscular blockers, used when patients are put on ventilators. 

In six states oxygen supplies are dangerously low, according to the health ministry. 

The National Forum of Governors warns that shortages threaten to cause “a collapse within the collapse”.



Bahia, a state in Brazil’s north-east, is experiencing “pressure”, not complete failure, says its health secretary, Fábio Vilas-Boas. 

But that is bad enough. The number of patients needing oxygen has “exploded”. 

Some hospitals are treating covid-19 patients in emergency rooms because their intensive-care units (icus) are full.

Brazil’s second wave is thought to be mostly caused by a variant of the novel coronavirus, called p.1, which was probably born in the Amazonian city of Manaus. 

More contagious than the original, and able to reinfect people who have already had covid-19, p.1 has alarmed not just Brazil but the rest of the world. 

It has been detected in 33 countries. 

Some vaccines are less effective against p.1 than against other major variants of the virus in Europe and the United States.

The country’s neighbours are slamming shut their doors. 

Peru and Colombia stopped flights from the country. 

Just two of Brazilians’ top ten destination countries remain open to them. 

“If Brazil is not serious, then it will continue to affect all the neighbourhood there and beyond,” warned Tedros Adhanom Ghebreyesus, the head of the World Health Organisation.

But seriousness, like muscle blockers, is in short supply. 

Mr Bolsonaro has touted quack cures, railed against lockdowns and tried to thwart the publication of data. 

He has just bid farewell to the third health minister (an army general) since the pandemic began. 

Vaccines are not for him, Mr Bolsonaro has claimed. 

His government was slow to order them, even though manufacturers such as Pfizer and Janssen had tested them in Brazil.

Governors and mayors, who implement lockdowns, have largely followed the president’s lead. 

After clamping down at the beginning of the pandemic most quickly eased up. 

But even when restrictions are in place, Mr Bolsonaro’s rhetoric can scupper their enforcement. 

In Bahia’s poor neighbourhoods life has continued as normal, at least until very recently. 

“We can’t impose on those who live in favelas the obligation of being inside a hot small house,” says Dr Vilas-Boas. 

The state does not have enough police to ensure that bars stay closed.

That a variant like p.1 was born in Manaus comes as no surprise, says Natalia Pasternak, a microbiologist who leads Instituto Questão de Ciência, which advocates the use of science to shape policy. 

The city’s first wave was so severe that some thought it had reached herd immunity. 

Residents thronged riverside beaches at the first opportunity, giving p.1 a fast start in life. When it left the forest, other parts of the country made it equally welcome.

Although Brazil does too little gene sequencing to know for sure how widely it has spread, studies in São Paulo state identify the variant in 80-90% of cases.



P.1 is frightening because it may be both more contagious than earlier versions and able to reinfect people. 

One study suggested that it could be up to twice as transmissible and could reinfect 25-61% of people who have had covid-19. p.2, a worrying variant from Rio de Janeiro, is also spreading.

The shock of the second wave is changing people’s behaviour. Governors and mayors are now tightening restrictions and people are obeying them more. 

From March 22nd a nightly curfew in Bahia begins at 6pm rather than 10pm. 

Bahians have recently cut in half the distance they travel, according to mobile-phone data. 

This is slowing covid-19’s spread. 

Dr Vilas-Boas estimates that the number of active cases in Bahia has dropped from 21,000 to 17,000. 

The number of patients waiting for beds in icus fell from 513 on March 12th to 280 ten days later.

This month the federal government finally agreed to buy Pfizer’s vaccine and the one-dose jab from Janssen. 

They will supplement the AstraZeneca and Chinese CoronaVac vaccines already being administered. 

Brazil has begun domestic production, too. 

Fiocruz has delivered its first homemade doses of AstraZeneca; the Butantan Institute in São Paulo has begun making CoronaVac. 

Some 8% of adults have had a first jab. 

“For the first time,” says Ms Pasternak, “I’m hopeful.”

On March 23rd, when the daily death toll reached a record 3,158, Mr Bolsonaro went on television to boast of Brazil’s vaccination progress. 

Yet as long as social distancing is needed the president will remain a menace to Brazilians’ health. 

He has filed suits in the Supreme Court against three states, including Bahia, that have tightened lockdowns. 

His actions are bad for Brazil—and for the world.

Our task turns from conquering coronavirus to preserving liberty

You can travel abroad to sell your second home, but what about visiting granny?

Camilla Cavendish

                                                                                                            © Jonathan McHugh 2021


Vaccines were supposed to bring an end to the Covid emergency, a rose-tinted finale after a very dark year. 

But the film has gone into slow motion. 

More than half of all UK adults have had at least one jab, and hospital admissions have plummeted. 

But ministers have become strangely addicted to extending curbs on liberty.

As parliament rolls over emergency powers in the Coronavirus Act for another six months — three months longer than the promised end of lockdown — and the government pushes authoritarian plans to crack down on protest and foreign travel, I am left wondering which is worse: the casual alacrity with which ministers now crush democratic freedoms or the lack of reaction. 

Her Majesty’s Opposition seems to be stuck on mute. 

The only people trying to hold the government to account are Tory backbenchers of the lapel badge-wearing kind, who aren’t terribly telegenic.

Boris Johnson desperately wants an “irreversible” path out of lockdown. 

So it’s understandable that he doesn’t want to risk moving too fast. 

But having been chided a year ago for recklessness, his government has become peculiarly risk averse, just at the wrong moment. 

Matt Hancock said on Thursday that he cannot predict whether the emergency legislation will actually be retired in six months’ time. 

But the second wave is over. Hospital admissions are 90 per cent below their peak. 

You can’t justify unprecedented incursions into freedoms if there is no emergency.

Ministers are worried that the South African variant could wreak havoc and reduce the efficacy of our vaccines. 

So far, however, the evidence is unclear. 

Moreover, if the government was really so terrified of the South African variant, it wouldn’t be letting the rich travel to rent property, while forbidding the rest of us to go on holiday.

A year ago, as the world was shutting down, I flew on an eerily empty plane from New York to Heathrow. 

I expected a grilling or at least a temperature check. 

All I got was an apologetic leaflet, in English, asking if I’d possibly mind telling someone if I’d been in Wuhan, China. 

Twelve months on, when we have a vaccine and regular Covid testing, ministers want to levy £5,000 fines for even showing up at an airport, without a “reasonable excuse”. 

These include competing in elite sports, volunteering and weddings, but not seeing a spouse or parent.

This feels like an attempt to fight the last war, by politicians and their scientific advisers who were burnt by the death toll. 

And it comes with laughable loopholes. 

You can travel abroad to sell your second home — the so-called “Stanley Johnson clause”, named after the prime minister’s father. 

But such is the mania for stoking the housing market that in England and Wales estate agents and prospective buyers are visiting homes in gay abandon. 

You can pop in to see any old stranger if you fancy taking a peek around their house. 

You just can’t visit granny.

As the contradictions mount, the justifications for restrictions are wearing thin. 

The government has urged the public to get the jab, take Covid tests and quarantine. 

Most people have complied, expecting that normal service will soon resume. 

And it must, for this third lockdown has brought the country to its knees. 

Who is speaking for the women suffering domestic abuse, the children who are overwhelming psychiatric waiting lists, the old people crippled with loneliness, the patients who still can’t get a GP to see them in person, despite needing more than a cursory video call? 

When did we decide to abandon these people? 

The government talks of pegging its road map out of lockdown to “data, not dates”, but where is the cost-benefit analysis on mental health and economic hardship?

Mothers see what is happening. 

At the school gate, in the supermarket, on social media, we hear the whispered truths of damage and anguish which will leave scars long after Covid. 

Those in Westminster, drawing a reliable monthly salary and living in comfort, don’t seem to realise that a nation at breaking point may not have the energy to raise its voice. 

When polls show support for continued restrictions, thoughtful MPs should ask themselves how exactly a nation became so fearful.

In September, chancellor Rishi Sunak urged the nation to learn to live with coronavirus and “live without fear”. 

Since then, some terrible things have happened, and the EU’s mishandling of vaccines has increased uncertainty. 

But we must regain our sense of proportion, buoyed by a vaccine rollout which has gone even better than might have been expected in terms of take-up and efficacy.

None of this is easy. 

But groupthink seems to have taken hold in the corridors of power and our liberal prime minister has become risk-averse, just when he needs to recover his chutzpah.

He also needs to make sure trigger-happy ministers don’t use Covid to erode democratic freedoms. 

The police, crime, sentencing and courts bill would give the police draconian powers to stop demonstrations, even protests by a single person, and let the home secretary decide which protests constitute “serious disruption” — a provision more suited to Russia or China. 

Meanwhile, the period for reviewing restrictions has quietly been increased. 

In March 2020, the first set of health protection regulations were required to be reviewed every 21 days. 

Now, it’s every 35.

Despite the tragic loss of life, we are closer to being able to live with the virus and manage it, as Hancock envisages, “more like flu”: with repeated booster shots of annually updated vaccines. 

We still don’t know everything. 

But if we don’t restore our sense of proportion, we may find we have lost it forever.


The writer, a former head of the Downing Street policy unit, is a Harvard senior fellow.

How to handle the gamification of investing

Regulators are fretting about the new breed of young day traders

THE EDITORIAL BOARD 

The Reddit forum WallStreetBets logo on a smartphone. The pandemic has brought an explosion in retail investing © Brent Lewin/Bloomberg


Some might be surprised to learn that Britain’s financial regulator has an Instagram account. 

Insiders joke that TikTok may not be far off. 

Needs must, when the watchdog revealed this week that four out of 10 young people do not fully appreciate that high-return investments mean they might lose money. 

They have to be warned somehow, and social media is where novice investors are gleaning tips.

The pandemic has brought an explosion in retail investing, driven sometimes by spare cash (bolstered in the US by government handouts), boredom, or despair. Jobs are scarce, above all for the young, interest rates puny and house prices out of reach. 

Making a slow buck no longer makes sense.

Pair that with a global equity rally, bitcoin gaining 170 per cent in value in 2020, shrinking trading fees and a proliferation of new trading apps and it is hardly surprising that the number of retail investors has grown 15 per cent over the past year in the UK alone.

Fledgling traders are driving the rise, and are more likely to be drawn to high-risk investments, according to the UK Financial Conduct Authority. 

They are enticed by a new breed of online brokers that have learnt from social media how to capture attention through encouraging frequent trading, and also offer part-purchase of shares; the so-called gamification of finance. 

Sadly, retail investors who trade often are more likely to nurse losses.

Although the FCA research predates the US trading frenzy around GameStop, the saga underlined the benefits and dangers for neophyte day traders, as the stock reached dizzying heights — squeezing hedge funds with short positions — only to plummet. 

The UK watchdog, which has a consumer-protection mandate, is right to sound the alarm. 

It has also faced fresh criticism for its mishandling of complaints around London Capital & Finance, which pushed unregulated, high-risk mini-bonds on pensioners and retail investors, then collapsed. 

An independent report found the regulator failed to effectively supervise LCF.

That scandal largely turned on those nearing retirement with lifetime savings to invest thanks to pension liberalisations. 

The FCA’s attention is now trained on younger investors but several elements echo across the ages: an overconfidence in investing nous; the chase for yield in a low-interest environment; the proliferation of online advertisements; the dearth of affordable, independent advice; and the confusing thicket of UK rules around what is and is not regulated and therefore what carries protection.

An easy step to help protect investors would be for the government to include financial scams in its Online Harms Bill, which will require social media sites to take down harmful content or face hefty fines. 

Currently, the FCA can only politely ask Google, Facebook and other platforms to remove blatantly fraudulent advertisements. 

The watchdog and a committee of MPs have pushed for fraud to be included in the bill, yet the government has declined.

There is a difference between scams and products that are simply high-risk — an educational gap that the FCA must fill, on Instagram if need be.

It has certainly deployed memorable communications strategies before, including an animatronic head of Arnold Schwarzenegger to telegraph a mis-selling compensation deadline. 

The FCA could also do a lot better when it comes to overseeing less risky, regulated products, as investors in Neil Woodford’s imploded fund can attest.

For now, the gamification of finance does not create better investors; it just encourages more frequent armchair trading. 

Unless traders learn the risks, it might be game over.