Central bank digital currencies may not replace crypto, BIS says

Policymakers worry that growth of cryptocurrencies could lead to central banks losing control

Eva Szalay and Philip Stafford in London 

The headquarters of the Bank for International Settlements © Bloomberg

Central banks are jostling with private-sector operators of stablecoins to dominate digital money and protect consumers, the global body for policymakers has said.

Private digital assets could coexist with potential digital currencies operated by central banks, the Bank for International Settlements said in a report on Thursday. 

Central bank versions would rely on banks and other financial institutions to act as intermediaries to create credit and help safeguard financial stability, it added.

The paper reflects growing anxiety among policymakers that the rapid growth of cryptocurrencies and private sector initiatives around payments could lead to central banks losing control of their money.

The study is the second report from the BIS on central bank-backed digital currencies, which are in part an effort from national authorities to combat the threat to their role. 

The report is an update on the foundational principles of central bank digital currencies set out by a group of seven central banks in October last year. 

The latest findings come from the same group, which includes the central banks of the US, EU, UK and Japan.

“The central banks contributing to this report have already identified that a CBDC could be an important instrument for ensuring that they can continue delivering their public policy objectives even as the financial system evolves,” the study said.

Stablecoins are crypto tokens native to blockchain technology that typically claim to be backed one-for-one by traditional assets such as dollar debt. 

They offer a relatively easy way for cryptocurrency traders to hop in and out of coins such as bitcoin and ethereum, and are often touted as a potential crypto-based alternative to traditional currencies such as the dollar as a means of payment.

Fast-growing stablecoins — the biggest of which are Tether and USD Coin — are worth nearly $130bn, according to CoinGecko, a specialist website. In a global context, that is a small part of the financial system.

Nevertheless, rating agency Fitch warned in July that stablecoin operators could trigger contagion in credit markets if they were forced for any reason to unwind their reserves. 

International regulators are expected to release minimum standards for private stablecoins in the coming weeks.

The BIS report found that significant stablecoin adoption could lead to fragmentation and “excessive market power”.

The paper acknowledged that there were also risks associated with central bank-backed alternatives, but said that private initiatives would have “lower public benefits” because they would not be interchangeable with other forms of money and because they lacked the protections that came with national currencies.

“Central banks have a responsibility to ensure that citizens have access to the safest form of money — central bank money — in the digital age,” said ECB president Christine Lagarde, chair of the group of central bank governors responsible for the reports.

Global central banks’ efforts to create digital currencies are uneven. 

While China, Sweden and the Bahamas are at an advanced stage, major policymakers in Europe and the US have committed only to exploring the possibility of launching their own. 

The latest study from the BIS draws together the principles and design ideas that the seven central banks consider to be desirable.

The study suggests policymakers are hoping their version of digital money will trump private offerings because of their reach and ability to fit into existing systems and financial infrastructures.

The latest recommendations advocate that central bank digital currencies rely on commercial banks to create credit for consumers. 

Any credit created by a central bank would be recycled into the payments system, the report suggested.

Separately Isda, the trade body for the derivatives industry, said on Thursday it was setting up a working group to develop legal documentation for trading derivatives of digital assets. 

The body’s master agreements underpin trillions of dollars worth of derivatives contracts around the world.

What Happens if the U.S. Defaults on Its Debt?

By Andrea Riquier, MarketWatch

The Treasury Building. ALASTAIR PIKE/AFP/Getty Images

Even as Washington managed to avoid an imminent government shutdown Thursday, here’s why the status of the nation’s debt ceiling may ignite more worry in financial markets.

Sept. 30 marks the end of the federal government’s fiscal year, and the deadline for Congress to pass a funding measure. 

Thursday’s stop-gap measure keeps the government funded until early December.

The debt ceiling, which is the amount of money lawmakers authorize the Treasury Department to borrow to pay for spending already authorized, must be suspended or raised by Oct. 18, according to Treasury Secretary Janet Yellen, or the U.S. likely will default on its debt.

It’s important to note that no one knows precisely when the U.S. Treasury will run out of money to pay its bills, including bondholders, let alone what would happen next. 

U.S. sovereign debt generally has been considered the safest and most liquid to own in the world, and all kinds of financial market products and processes have been pegged to the orderly functioning of the nearly $21 trillion Treasury market.

Still, after a couple of topsy-turvy years in which the previously unthinkable became real, some Washington and Wall Street professionals have been girding for a worst-case scenario.

“I see it as an exceedingly slim chance, although with all the theatrics, the possibility has been ramped up,” said Ben Koltun, director of research for D.C.-based Beacon Policy Advisors. “If it does happen, it turns a manufactured political crisis into an economic crisis. The full faith and credit of the U.S. would no longer be full.”

The stalemate on Capitol Hill right now is over a $3.5 trillion spending package.

Will the U.S. run out of money?

In a research note published Sept. 22, Barclays analyst Joseph Abate noted there’s additional uncertainty over the debt ceiling now because it coincides with a funding package Congress needs to pass. 

What’s more, changes brought by the pandemic have made it far more difficult to assess the state of the Treasury Department’s expected payouts and inflows.

While most analysts expected a mid-October “X date,” when Treasury will run out of money to pay bills, Yellen on Tuesday told Congressional leaders that it would be Oct. 18. “At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” she wrote in an update.

Beacon’s Koltun, among others, thinks markets will start to get antsy even earlier than that.

The very idea of a U.S. default remains so incongruous that the reaction in financial markets isn’t the only unknown. 

The current showdown in Washington also has raised big questions about the financial-systems infrastructure. 

It’s a bit like Y2K—no one knows how the computers will respond.

 “We do not believe and the market does not believe it’s a likely scenario,” said Rob Toomey, SIFMA managing director, capital markets and associate general counsel.  

“But it would be a real problem scenario for the system generally and operations and settlement specifically.”

Plumbing problems

SIFMA, the Securities Industry and Financial Markets Association, is the industry association that deals with the mechanics of how securities like sovereign bonds trade and settle. 

The group has worked with financial infrastructure providers including Fedwire and FICC to try to devise some sort of playbook. 

For now, there are two possible scenarios:

If the Treasury Department knows that it will miss a payment, it would ideally announce that at least a day in advance. 

That would allow the maturity dates of the bonds in question to be changed: a Monday maturity date would be changed to Tuesday, a Tuesday maturity would be changed to Wednesday, and so on. 

These revisions would happen day by day.

While that sounds relatively orderly, it still leaves many unknowns. 

For one thing, it could bifurcate the market for Treasury bonds and bills into those that are clearing normally and those whose maturity dates are being massaged, SIFMA told MarketWatch. 

That means a great deal of uncertainty around pricing and what it means for all the downstream securities pegged to Treasury rates.

In a second scenario, which SIFMA said would be very remote, Treasury cannot, or does not, give any advance warning of a failure to make a payment, and it just happens. 

That would be far more chaotic, “a real problem scenario,” as SIFMA says.

Strangely, the securities in question would probably simply disappear from the system. 

That’s because if a bond is supposed to mature—and be paid—on a particular day, the system assumes it has been. 

“It just illustrates the fact that the system wasn’t designed for this,” SIFMA notes.

If that happens, there would be a holder of record for the debt on the day before the maturity was scheduled, who would be entitled to get paid. 

However, it’s also likely that Treasury might pay some additional interest to make the bondholder whole.

Many analysts, including Moody’s Analytics Chief Economist Mark Zandi, think it’s highly likely that a financial market freak-out—think of the day in 2008 when Congress initially failed to pass the Troubled Asset Relief Program legislation meant to address the financial crisis—would stop any of the scenarios SIFMA envisions before they happen, or a few minutes after midnight on the day they will.

What Koltun calls a “game of chicken” also may already be denting the economy. 

The last two times Congress came close to not raising the debt limit, in 2011 and 2013, Moody’s Analytics found, “heightened uncertainty at the time reduced business investment and hiring and weighed heavily on GDP growth. 

If not for this uncertainty, by mid-2015, real GDP would have been $180 billion, or more than 1%, higher; there would have been 1.2 million more jobs; and the unemployment rate would have been 0.7 percentage point lower.”

Uncertainty rippling through the Treasury market in 2013 cost taxpayers anywhere from $40 million to $70 million, Barclay’s reckons.

The Strange Death of Conservative America

American conservatives once sought to ride the waves of markets and innovation toward ever-greater wealth and prosperity, but now they cower in fear. And, as the trajectory of today's Republican Party shows, that makes them a threat to democracy.

J. Bradford DeLong

BERKELEY – If you are concerned about the well-being of the United States and interested in what the country could do to help itself, stop what you are doing and read historian Geoffrey Kabaservice’s superb 2012 book, Rule and Ruin: The Downfall of Moderation and the Destruction of the Republican Party, from Eisenhower to the Tea Party. 

To understand why, allow me a brief historical interlude.

Until roughly the start of the seventeenth century, people generally had to look back in time to find evidence of human greatness. 

Humanity had reached its peak in long lost golden ages of demigods, great thinkers, and massive construction projects. 

When people did look to the future for promise of a better world, it was a religious vision they conjured – a city of God, not of man. 

When they looked to their own society, they saw that it was mostly the same as in the past, with Henry VIII and his retinue holding court in much the same fashion as Agamemnon, or Tiberius Caesar, or Arthur.

But then, around 1600, people in Western Europe noticed that history was moving largely in one particular direction, owing to the expansion of humankind’s technological capabilities. 

In response to seventeenth-century Europeans’ new doctrine of progress, conservative forces have represented one widely subscribed view of how societies should respond to the political implications of technological and social change. 

In doing so, they have generally gathered themselves into four different kinds of political parties.

The first comprises reactionaries: those who simply want to stand “athwart history, yelling ‘STOP,’” as William F. Buckley, Jr. famously put it. 

Reactionaries consider themselves to be at war with a dystopian “armed doctrine” with which compromise is neither possible nor desirable. 

In the fight against this foe, no alliance should be rejected, even if it is with factions that would otherwise be judged evil or contemptible.

The second kind of party favors “Whig measures and Tory men.” 

These conservatives can see that technological and social change might be turned to human advantage, provided that the changes are guided by leaders with a keen appreciation of the value of our historical patrimony and of the dangers of destroying existing institutions before building new ones. 

As Tancredi explains to his uncle, the Prince of Salina, in Giuseppe Tomasi di Lampedusa’s The Leopard, “If we want things to stay the same, things will have to change.”

The third type of conservative party is found primarily (but not exclusively) in America. 

It emerges as an adaptation to a society that sees itself as overwhelmingly new and liberal. 

It is not a party of tradition and inherited status, but rather of wealth and business. 

In its ranks are conservatives who want to remove government-imposed hurdles to technological innovation, entrepreneurship, and enterprise. 

Confident that the free market holds the key to generating wealth and prosperity, they breathlessly tout the merits of surfing its waves of Schumpeterian creative destruction.

Lastly, there is the home of the fearful and the grifters who exploit them. 

This constituency includes all those who believe it is they who will be creatively destroyed by the processes of historical change. 

They feel (or are led to believe) that they are beset on all sides by internal and external enemies who are more powerful than they are and eager to “replace” or “cancel” them.

What I have learned from Harvard University political scientists Steven Levitsky and Daniel Ziblatt’s 2018 bestseller, How Democracies Die, is that democratic countries can be governed well only if their conservative parties fall into the second or third of the four categories above. 

When conservatives coalesce around reaction or fear, democratic institutions come under threat.

Levitsky and Ziblatt offer many examples to demonstrate this, but let me add one more. 

A little over a century ago, Great Britain experienced an astonishingly rapid decline from its position as the world’s political and economic hyper-power. 

This process was accelerated significantly by the transformation of its Tory Party into a party combining types one and four. 

This was the party of Mafeking Night (Boer War) celebrations and armed resistance to Irish constitutional reform. 

In the 1910-14 period, George Dangerfield later recalled, the world witnessed the “strange death of liberal England.”

That brings us back to Kabaservice’s book, which tells the story of how the US Republican Party put itself on an analogous course. 

When I look out at the current political scene, I see very few elements of categories two and three in the Republican Party. 

And any that are left are fast disappearing.

Republican politicians today are desperate to pick up the mantle of Donald Trump, undoubtedly one of the worst presidents in American history. 

Obviously, this dangerous and embarrassing trend needs to be reversed as rapidly and as completely as possible. 

But I, for one, am at a loss to see how that might be done.

J. Bradford DeLong is Professor of Economics at the University of California, Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.