What is the BIS and why care what they think?
The BIS stands for the Bank of International Settlements; it’s basically the hub for all Central Banks. Their mission is to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks.
Cryptocurrencies stand at a major inflection point. While Central Bank Digital Currency projects (CBDCs) are poised to further governmental control over individuals, cryptos and stablecoins stand in opposition, allowing permissionless transactions that can bypass traditional banking systems.
This article is a compilation of quotes and highlights from the second BIS Innovation Summit held March 22-23, 2022 that presents how the financial powers that be are thinking about cryptocurrencies.
While some disdain the financial elite and consider their opinions worthless, I take the opposite approach. The prudent investor must seek to understand their ideas and agenda. They have great power to direct regulation and laws that will severely impact the future of finance, and the portfolios of those holding crypto assets.
In the Welcome and Opening Speech, BIS GM Agustin Carstens emphasized sustainability as a key value of financial systems and said:
The financial system of the future should not pose undue risks to the environment. The excessive energy consumption related to some cryptocurrencies is a case in point. They show what can happen when technological products are developed without regard to their broader societal consequences.
Shots fired! This is clearly a slam of Bitcoin (BTC-USD) and Ethereum (ETH-USD) (for now) due to their need for electricity intensive Proof of Work mining.
In the same session, François Villeroy de Galhau (Chair, BIS Board of Directors and Governor, Bank of France) followed up with:
The use of bitcoin as a means of payments remains very marginal because it does not feature any of the fundamental characteristics of currency nor is bitcoin really a store of value but rather a speculative asset somewhat similar to say the dutch tulip bulbs from the 17th century.
This is Peter Schiff’s no intrinsic value argument. Or as I like to post on Twitter, “nO inTrinSic vALue” Fun fact: mixed capitalization is a SpongeBob meme. It is based on repeating something in a childish way to mock it.
President of the European Central Bank, Christine Lagarde chimes in:
I’m talking about the crypto assets here. Has it been a threat in the past? Yes, because when you look at a lot of the dubious transactions that are taking place, a lot of the criminal activities payments that are taking place very often you find some crypto assets. I won’t mention any names but we know what uh, we’re talking about here.
What is she talking about? Bitcoin of course.
There were no speakers in 2022 but Joseph Lubin, one of the founders of Ethereum, participated in a panel last year called, CeFi to DeFi: can global finance be de/re-constructed?
There were a few mentions of Ethereum during panel discussions, but nothing for or against by any of the main speakers. In contrast, Bitcoin was the poster child for everything wrong in crypto.
Andrew Bailey (Governor, Bank of England) emphasized that DeFi and crypto don’t abide in a separate world where normal rules do not apply, a world of libertarian principles that operates independently.
We operate in one system.
He also introduced the idea of Central Bankers as a controlling mind or institution that sets rules and regulations for the public. In contrast, he characterizes DeFi as operating on artificial intelligence. Can there be a world where there is no controlling human mind? His answer is no, but he concedes DeFi will make designing regulations much more complicated.
In the Welcome session, François Villeroy de Galhau says:
Among second generation crypto assets so-called stable coin or banked assets try to reduce their volatility by anchoring themselves to fiat currencies and sovereign assets. Still they create fragmentation and… regulatory and operational uncertainties. Here too there are historical precedents, Free Banking in the 18th and 19th century when each private bank issued its own banknote.
It’s true some algorithmic stables are any anything but stable, losing their peg. But USDC is public, asset backed, open sourced, and audited monthly to prove their reserves. Nic Carter refutes the Free Banking comparison and shows how the monetary elite are often wrongheaded about stablecoins.
Christine Lagarde pointed out in her interview session that it does not have to be an either or choice between stablecoins and CBDCs.
John Williams (President, Federal Reserve Bank of New York) stated that stablecoins have potential for cross border and wholesale payment purposes. But the standard concerns are applicable: investor protection, financial stability, transparency, very safe backing, and dependable conversion back to the dollar during times of market stress to avoid a bank run situation.
Williams also gave the opinion that cryptocurrencies generally have fundamental flaws. They don’t serve as a medium of exchange due to fluctuating values, lack of transparency, and extreme cost of transactions. He also flags the environmental cost of some, another reference to Bitcoin.
Those speakers that thoroughly understood stables made a clear distinction between asset based, fully regulatory compliant coins versus less trustworthy algorithmic ones.
Also from Carsten’s Opening Speech:
CBDC is a particularly important priority for the [BIS Innovation] Hub with five completed projects and at least three more to come this year. They include work on retail CBDC for the general public, and wholesale CBDC for use by financial institutions particularly in the form of multi-CBDC arrangements that will make cross-border payments faster, cheaper, and more efficient.
Christine Lagarde said the Digital Euro is on time and on budget so far. From here it will be a two year journey before moving to the last phase of experimentation and implementation.
Brian P Brooks (Chief Executive Officer, Bitfury) during the panel, Does DeFi need sovereign money? offered this perspective:
What all this says about the payment system has a lot to do with whether Central Bank Digital Currencies take over in which case we won’t need DeFi as part of the payment system. At that point you will have a central command and control system for payment clearing. And we sort of see what that looks like. I come back to the Canadian trucker protest as an example of when governments take over the system. At that level they can determine what gets paid and what doesn’t, what remittances get canceled and what don’t.
Brooks made an important point about CBDCs I’ll expand upon in the Takeaways section of this article.
During his session, Jerome Powell (Chairman of the Board of Governors) points to the recently published discussion paper on the future of money. While the Fed has not made any decisions on issuing a CBDC or about the technology design, they have outlined four key principles guiding their thinking. A CBDC would 1) need to ensure user privacy but also 2) be identity verifiable to prevent money laundering and terrorist financing. A US CBDC would be 3) intermediated by the current banking system to leverage the private sectors ability to innovate, manage identity, and exercise AML frameworks. Finally 4) it would serve as a widely accessible means of transactions between customers of different intermediates.
Just like the first BIS Innovation Summit, no speakers or panelists from Ripple were present and there was no mention of Ripple or XRP during any session. I have more analysis about the outlook for Ripple and XRP here.
Conclusion and Takeaways
Luiz Pereira da Silva (Deputy General Manager, Bank for International Settlements) delivered an apt summary of the BIS and Central Banker’s thinking during the Closing Remarks session.
Digital innovation is reshaping the world around us including the financial world. This can lead to opportunities but also challenges. New opportunities can promote increased efficiency and inclusion but they can also come with risks of exclusion instability and fragmentation. Central Banks need to stand at the forefront of these developments to ensure that technology is a force for positive transformation; they need not only to put in place policies to address these changes but to innovate themselves.
My takeaways (these are strictly my opinions):
Central Banks: desire to maintain their status quo by gatekeeping technology and innovation. Their ideological position is that humans must run financial systems, and they are the best people to do it.
Cryptocurrencies in general: bankers reject the validity of cryptocurrencies but see opportunity to repurpose the underlying technology to build CBDCs.
Stablecoins: with the exception of a few like USDC, all will eventually be targeted by regulators. Circle (the issuer of USDC) will avoid this by working within the system to become a crypto bank.
CBDCs: remain a top priority for the BIS and Central Banks. Although most say no decision has been made as yet, the seductive nature of additional financial control through this technology will be irresistible. This will be cloaked in the holy robes of AML, KYC, and anti-terrorism but will result in additional government control of transactions unless stopped.
Bitcoin: according to the Central Bankers, Bitcoin is anti-environment, has no intrinsic value, and is used by criminals. I believe the climate change argument against Bitcoin is the primary reason institutional buying has dried up and the price is still 40% below the all-time high. A word to the wise: the environmental concern is a real problem, has no easy solution, and is likely to get worse.
Ethereum: As Ethereum moves from proof of work to proof of stake later this year, it can escape the characterization of being an environmental offender. At that point, it may become the green friendly, approved crypto for institutional adoption. And then watch out.
XRP and all other cryptocurrencies: not even on their radar. The financial elite are very transparent with their agenda. Other than hating Bitcoin, loving CBDCs, and being tolerant of some stablecoins, they just aren’t talking about any other tokens. Sorry guys.
DeFi: is taken seriously as a threat to the legacy systems but the bankers are struggling with a response. Like all other financial products, the main goal is to bring DeFi into the current systems to impose regulations.