Mark Carney, Governor of the Bank of England and Chairman of the G20’s Financial Stability Board, said cryptocurrencies like bitcoin and ethereum show the way to the future of money in a speech solely dedicated to the topic of money in general and cryptos in particular.
Acknowledging a history of monetary debasement, from Henry VIII reducing the precious metal content of his coins during the Tudor era to Reichsbank financing the government in Weimar Germany, Carney nonetheless insisted:
“The private financial sector cannot create money without limit, but is disciplined by competition, constrained by prudential regulation, and limited by decisions of households and companies that can reduce the stock of money (by, for example, repaying existing debt).”
Bringing us to modern days, the central bank governor showed some familiarity with the development of cryptocurrencies, starting:
“In the depths of the global financial crisis, the coincidence of technological developments and collapsing confidence in some banking systems sparked the cryptocurrency revolution.”
He however argues they’re not performing well their function of currency as they are not a good short-term store of value and are not widely accepted for payments.
The governor then focuses solely on bitcoin and its well known many scalability problems, without acknowledging the tremendous amount of work that has gone into it to reach the point where it is now conceptually solved.
In any event, cryptos are growing in popularity, therefore he says policy makers have to decide whether to isolate them, regulate them, or integrate them. Dismissing an outright ban, he says:
“A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system.
The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities.”
He therefore is seemingly arguing for slowly integrating digital currencies into the wider legacy financial system because of “major opportunities from the development of the underlying payments technologies” as the new begins replacing the old.
“Bringing crypto-assets into the regulatory tent could potentially catalyse innovations,” Carney says, before adding in a part of his speech we’ll quote at length:
“Crypto-assets help point the way to the future of money in three respects: By suggesting how money and payments will need to adjust to meet societies’ changing preferences, particularly for decentralised peer-to-peer interactions; Through the possibilities their underlying technologies offer to transform the efficiency, reliability and flexibility of payments; and by the questions they raise about whether central banks should provide a central bank digital currency (CBDC) accessible to all.
First, crypto-assets are part of a broader reorganisation of the economy and society into a series of distributed peer-to-peer connections across powerful networks. People are increasingly forming connections directly, instantaneously and openly, and this is revolutionising how they consume, work, and communicate.
Yet the financial system continues to be arranged around a series of hubs and spokes like banks and payments, clearing and settlement systems. Crypto-assets are an attempt to create the financial architecture for peer-to-peer transactions. Even if the current generation is not the answer, it is throwing down the gauntlet to the existing payment systems. These must now evolve to meet the demands of fully reliable, real-time, distributed transactions.
Second, the technologies underlying crypto-assets, particularly distributed ledger, can: Increase the efficiency of managing data; Improve resilience by eliminating central points of failure, as multiple parties will share replicated data and functionality; Enhance transparency (and auditability) through the creation of instant, permanent and immutable records of transactions; and Expand the use of straight-through processes, including with “smart contracts” that on receipt of new information, automatically update and if appropriate, pay.
These properties mean distributed ledger technology could transform everything from how people manage of their interactions with public agencies, including their tax and medical records, through to how businesses manage their supply chains.
Third, crypto-assets raise the obvious question about whether their infrastructure could be combined with the trust inherent in existing fiat currencies to create a central bank digital currency (CBDC).”
A central bank digital currency directly accessible to all would be a transformation in the financial system for banks would no longer be able to print money through loans and interest.
Switzerland is to hold a binding referendum on the matter on June the 10th, so bringing the topic of money to public debate more than a century since it was discussed after fiat dollars were unconstitutionally declared legal tender.
Carney is against the idea of debt-free money, which is what the central bank issued digital currency would imply. And his speech suggests the main problem is the payment infrastructure with the bank so trying to make it more efficient, rather than the banking collapse due to endless money printing constrained only by competition, and the bank deposit haircuts that followed.
“Even if the current generation is not the answer, it is throwing down the gauntlet to the existing payment systems. These must now evolve to meet the demands of fully reliable, real-time, distributed transactions,” Carney said.
In that statement, perhaps unaware, he acknowledges digital currencies are bringing about Hayek’s free market money by making central bank issued currencies or otherwise compete with the innovative free market.
A little mismanagement from the central bank therefore, as they are bound to do and keep doing across the world, and their money becomes uncompetitive, not just in payments, but in its function of storing value, which they keep endlessly debasing.