Money laundering in Latvia cast doubt on ECB credibility

Money laundering accusations in Latvia cast doubt on ECB credibility

By Aline Robert | EURACTIV.fr | translated by Freya Kirk

 Jun 27, 2018
ttps://www.euractiv.com/section/banking-union/news/money-laundering-accusations-in-latvia-cast-doubt-on-ecb-credibility/

A general view of the Latvia central bank building in Riga, Latvia, 18 February 2018. Latvian central bank Governor Ilmars Rimsevics was detained by the Corruption Prevention and Combating Bureau (KNAB) due to the ongoing investigation into allegations of corruption. [EPA-EFE/VALDA KALNINA]

Languages: Français

The governor of the Latvian central bank, suspended by the Parliament, continues to face extraordinary accusations. The Commission has promised to set up a working group by the summer to tackle money laundering. EURACTIV.fr reports.
A 200-kg safe was found empty in a wood not far from Riga, the Latvian capital, and intrigued the local police. According to the local news agency LETA, it was found empty after being stolen from the central bank governor Ilmars Rimsevics’ house in March. Just after Rimsevics spent 48 hours in police custody after being accused of corruption.

Latvia's chief banker arrested by anti-corruption officials

Anti-corruption authorities in Latvia have arrested the governor of the country’s central bank, Ilmars Rimsevics, the government said Sunday, while assuring there is “no sign of danger” to the financial system.

Bribes and a safe
This has aroused suspicion about the governor. In this country bordering Russia, some see this as another episode in a well-organised plot to undermine the credibility of the European Central Bank, and therefore Europe, in the run-up to Latvia’s parliamentary elections in October.
Non-resident holdings in Latvia still accounted for almost 40% of total assets held by Latvian banks last winter, i.e around €10.5 billion, most of it from Russia.
A member of the very select Executive Board of the European Central Bank, Rimsevics stated that the safe contained only family photos. Not the €100,000 a Russian banker accuses him of having asked for. And Europe’s leading bankers in Frankfurt have shown solid support – according to LETA they have filed an appeal at the CJEU against Ilmars Rimsevics’ suspension from his position as governor, a position decided by Latvian MPs.
Money laundering practices of some banks, a major challenge for the eurozone, lie at the root of this predicament. Last February, the American administration released a notice via the Financial Crime Enforcement Network (FinCEN), which classified the Latvian bank ABLV as a money laundering specialist.
“ABLV executives, shareholders and employees have institutionalised money laundering as a pillar of their business practices,” said the organisation, before listing grounds for serious concern, alleging that the bank was involved in money laundering practices concerning North Korea’s arms activities, contributed to the theft of assets in Moldovan banks and covered up corruption in Ukraine.
Enough to cause embarrassment for the governors of the ECB, responsible for the supervision of the bank. This also triggered an immediate capital flight at the ABLV bank.
In response, the ECB quickly suspended ABLV payments, freezing mainly Russian assets. This did not go down well in Latvia, and the same can be said for the statement made by the Latvian Central Bank governor, who said that no institution, not even his own, could deal with ABLV, following FinCEN’s statements.
The incident involving the safe, which the police say has no connection to ABLV, discredits the ECB a little more in the eyes of Latvians, although they don’t necessarily see it as manipulation, according to a Latvian source.

Latvian defence ministry says corruption claims may be disinformation campaign

Corruption allegations that led to the suspension of Latvia’s central bank governor yesterday (20 February) may be part of a disinformation campaign aimed at damaging trust in the country and influencing October elections, its Defence Ministry said.

ABLV shareholders are also taking legal action. The Luxembourg courts found in their favour in March, by prohibiting the liquidation of the Luxembourg branch of the Latvian bank. They have also lodged a case with the European Court of Justice, claiming that the ECB and the Single Resolution Mechanism have exceeded their powers on this issue.
Embarrassment in Brussels
The European Commission took its time to examine the situation before taking action: it was only in May, three months after the US notice, that it responded on the issue of money laundering. Three Commissioners wrote to the presidents of the financial regulatory authorities, inviting them to a joint working group dealing with the subject.
The US accusations are all the more embarrassing as no one disputes them: a bank in the eurozone did help North Korea finance its weapons programme, and help scammers loot Moldovan banks.
“It’s very embarrassing to depend on US authorities to do the job of monitoring money laundering,” said Danièle Nouy, head of the ECB’s Supervisory Board, during her hearing before the European Parliament in April.
This state of affairs results from the fact that the ECB has no power to enforce anti-money laundering as authorities from the different member states are supposed to carry out this task.
“The ECB cannot rule on infringements of anti-money laundering rules. It is only once such infringements have been established that the ECB can suspend a license,” said Nouy.
Commission questions effectiveness of monitoring
“Many recent cases of money laundering raise questions about the effectiveness of monitoring and the enforcement of anti-money laundering rules, which are in the hands of the national authorities,” a Commission spokesperson told EURACTIV.
The Commission has therefore invited the national supervisory authorities and the three oversight authorities (banking, insurance and financial markets) to a working group. This group should start work “before the summer,” according to the Commission.

Difficulties in combating money laundering in Europe

Despite tougher rules against money laundering, there are still many shortcomings among Member States, the European Central Bank and the Commission. EURACTIV.fr reports.

The Commission is also debating the advisability of setting up an ad hoc anti-money laundering authority. For Sven Giegold, Green MEP, such an authority is much needed.
“In a banking union, we need skills at the European level to enforce the anti-money laundering rules. It is unacceptable that the ECB depends on the decisions of anti-money laundering authorities because of the risks of financial crimes,” the MEP said.

Languages: Français

For big banks, breaking the rules is a trade secret

By David Dayen

Los Angeles Times, Jun 18, 2018 | 4:05 AM 

http://www.latimes.com/opinion/op-ed/la-oe-dayen-banks-regulation-20180618-story.html

The Wells Fargo logo above a trading post on the floor of the New York Stock Exchange. (Richard Drew / Associated Press)

In the Trump era, we may expect financial regulators to not regulate. But we don’t expect them to regulate, find wrongdoing, and then conspire with the wrongdoers to cover it up. But that seems to be what’s going on at the Office of the Comptroller of the Currency, which oversees federally chartered banks.

President Trump’s handpicked head of the OCC is Joseph Otting, former chief executive of OneWest Bank. Otting has decided to run interference for his CEO buddies, concealing evidence of a potential replay of the Wells Fargo fake account scandal.

Earlier this month, Otting’s office was forced to reveal some basic findings from an OCC review of sales practices at more than 40 large and midsize banks, triggered after Wells Fargo admitted to opening millions of accounts without customer consent. Thomas Curry, President Obama’s OCC chief, initiated the review, and Otting completed it in December.

Since then, OCC had said only that it found no “systemic issues.” But in fact OCC did unearth examples of other banks opening unauthorized accounts. In fact, it flagged 252 “matters requiring attention” and five “industry-wide” issues. I’m using frustratingly vague terms like “other banks” and “industry-wide issues” because nobody outside the the OCC knows which banks were cited, or for what behavior, or whether any were penalized.

Otting revealed a little more while testifying on Capitol Hill last week. Roughly 20,000 accounts were found to be out of compliance, he said, at least half of them unauthorized, out of 500 million accounts studied. Otting said this low ratio proved the issues were not pervasive.

Asked repeatedly to make the banks’ names public, Otting contended that would be “inappropriate.” In other words, the industry’s lead regulator believes that for banks, breaking the law is a trade secret.

The out-of-context numbers also fail to provide enough information to understand the problem. For example, the OCC looked at more than 40 federally chartered banks with over $10 billion in assets; did that subset include giants like Bank of America, JPMorgan Chase and Citibank, or not? The OCC also reviewed only three years of account openings, but Wells Fargo kept finding more fake accounts the further back they went, eventually settling on 3.5 million since 2002. It’s also unknown whether the OCC investigated other types of sales practices. Wells Fargo, for example, placed unwanted auto insurance on borrowers, overcharged servicemembers for mortgages, and performed close to a dozen other abuses.

Wells Fargo was not necessarily motivated by charging customers fees on unauthorized accounts; that generated relatively little income. The intention was to prove to their shareholders that the bank was growing by “cross-selling” products to existing customers. It wasn’t so much consumer fraud as it was securities fraud.

In a letter to lawmakers, Otting acknowledged that banks in the OCC review had credited employees for opening bad accounts — ones that were never activated or funded by an existing account. That sounds a lot like Wells Fargo’s scheme. Were these other banks also touting sales growth to investors? Are the stock valuations of the entire retail banking sector based on fraudulent numbers?

There has been plenty of murmuring about shoddy sales practices at major banks beyond Wells Fargo. Front-line salespeople with the Committee for Better Banks coalition have said for years that high-pressure sales tactics were the industry standard. A 2015 study of bank workers from the Center for Popular Democracy reached the same conclusion. Isolated enforcement actions and allegations against banks like TCF Financial, Citizens Financial Group, Santander and TD Bank highlight deceitful strategies to hit sales targets.

The industry’s lead regulator believes that for banks, breaking the law is a trade secret.

---

The OCC review could have uncovered the depth of high-pressure selling and whether reported sales numbers are based in reality. It could have given customers valuable information to decide where to hold their money. Instead, Otting has refused to come clean. And that’s thoroughly unsurprising, given what we know about the man.

In his first speech as OCC chair, Otting proclaimed, “I like banks!” and referred to financial institutions as his “customers.” Otting was caught buying financial stocks even after being nominated as a bank regulator. And when he ran OneWest Bank, it committed a litany of wrongdoing for which it paid hundreds of millions of dollars in fines. Otting is, at best, an unreliable narrator on matters of bank misconduct.

By hiding the details from OCC review, Otting is helpfully shielding banks from what could be a major scandal. This agency has historically acted more as a bank protector than a regulator. During the Obama administration, Thomas Curry started to change the culture, but under Otting it appears to have slid right back. If Otting doesn’t want people to believe that he plotted with his ex-fraternity of bank CEOs to bury their record of shoddy and predatory practices, he has one option: Release the report.

David Dayen is a contributing writer to Opinion.

In Europe this article is censored:

 

KPMG's audit work unacceptable, says watchdog

• BBC News, 18 June 2018

https://www.bbc.com/news/business-44526486

Image copyright Reuters

The auditing work of one of the world's "Big Four" accounting firms has been sharply criticised by the industry's watchdog.

KPMG audits had shown an "unacceptable deterioration" and will be subject to closer supervision, the Financial Reporting Council said.
The FRC added all the Big Four - which also include PwC, EY and Deloitte - needed to reverse a decline.
KPMG said it was "disappointed" and was taking steps to improve audit quality.
Every year the watchdog reviews the audits of Britain's biggest companies to ensure they meet certain standards. The FRC noted problems at all the firms, but KPMG was singled out for the poor quality of its work.
"There has been an unacceptable deterioration in quality at one firm, KPMG," the FRC said in a statement. "50% of KPMG's FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year."
Stephen Haddrill, head of the FRC, said: "At a time when public trust in business and in audit is in the spotlight, the Big Four must improve the quality of their audits and do so quickly.
"They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances."
He said firms "must strenuously renew" their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders.

'Taking action'

The increased scrutiny of KPMG will involve the FRC inspecting 25% more audits done by the firm in the 2018-19 financial year, the first time the FRC has taken such action.
Michelle Hinchcliffe, head of audit at KPMG, said: "We are disappointed that our overall audit quality score for our 2016/17 audits has decreased by 4% and that the steps taken in previous years have not resulted in the necessary improvements to audit quality. We are taking action to resolve this."
KPMG came in for criticism over its audit of collapsed construction firm Carillion earlier this year, and the FRC has opened an investigation into the group under the Audit Enforcement Procedure.
The auditor was also recently fined £3.2m by the watchdog over its audit of insurance firm Quindell. Last year, the FRC opened an investigation into KPMG's audit of the accounts of aero-engine maker Rolls-Royce.
Auditors review the accounts of firms to see if the figures are a true and fair reflection of companies' financial health.
But the accounting industry has faced a lot of criticism in the last few years over whether their verdicts on companies' accounts can be trusted.

cryptocurrencies

Crypto Celebrity McAfee Stops Touting ICOs, Citing ‘SEC Threats’

By

Benjamin Robertson

June 19, 2018, 11:09 AM GMT+2

https://www.bloomberg.com/news/articles/2018-06-19/crypto-celebrity-mcafee-stops-touting-icos-citing-sec-threats

One of the world’s most prominent promoters of initial coin offerings is calling it quits.
John McAfee, the anti-virus software pioneer turned cryptocurrency evangelist, said in a tweet on Tuesday that he will stop recommending ICOs because of unspecified “threats” from the U.S. Securities and Exchange Commission.

John McAfee

Photographer: Anthony Kwan/Bloomberg

“Due to SEC threats, I am no longer working with ICOs nor am I recommending them, and those doing ICOs can all look forward to arrest,” McAfee wrote from his verified Twitter account, which has more than 820,000 followers. “It is unjust but it is reality. I am writing an article on an equivalent alternative to ICOs which the SEC cannot touch. Please have Patience.”

McAfee, whose checkered past includes run-ins with police in Belize and a failed campaign to become the Libertarian Party presidential candidate, has been a regular on the cryptocurrency conference circuit and one of the industry’s most prolific boosters. He’s part of a vast network of social media influencers that have helped blockchain-related ventures raise billions of dollars from ICOs amid the global frenzy for virtual currencies.
The offerings have come under increased scrutiny from regulators in recent months, with the SEC calling them securities that should be registered with the regulator. Some analysts have said paid promoters of ICOs may be breaking the law by acting as unregistered broker-dealers. In March, McAfee tweeted a web link that showed he charged $105,000 per tweet to promote ICOs and other products.
The SEC and McAfee didn’t immediately respond to requests for comment.

KPMG to layoff 400 employees in South Africa after graft scandal

Business News

June 4, 2018 / 10:26 AM / Updated 21 hours ago

KPMG to layoff 400 employees in South Africa in latest shake-up after scandal

Nqobile Dludla

https://www.reuters.com/article/us-kpmg-jobs/kpmg-to-layoff-400-employees-in-south-africa-after-graft-scandal-idUSKCN1J00W1

JOHANNESBURG (Reuters) - Global auditor KPMG said on Monday it will axe up to 400 staff in South Africa in its latest shake-up following a corruption scandal in the country, which saw it lose several major clients.

FILE PHOTO: The offices of auditors KMPG are seen in Cape Town, South Africa, September 19, 2017. Picture taken September 19, 2017. REUTERS/Mike Hutchings/File Photo

The auditor has taken a number of steps since last September to help restore the reputation of its South African business, including changes to corporate governance and management and measures to improve risk management.
On Monday it said it plans to have just four business hubs in South Africa - in Johannesburg, Cape Town, Durban and Port Elizabeth - and will appoint some executives from KPMG International to KPMG South Africa’s board.
It will close small regional offices in Mbombela, Bloemfontein, Polokwane and East London, resulting in the lay offs, KPMG South Africa’s CEO Nhlamulo Dlomu said during a conference call.
KPMG’s South African unit has been under close scrutiny since 2017 over work done for a company owned by the Gupta family - who have been accused of using their links to former president Jacob Zuma to influence government decisions and the awarding of tenders - and more recently for small lender VBS Mutual Bank.
The Guptas and Zuma have denied any wrongdoing.
Dlomu said the offices that will close were quite dependent on audit work carried out for the Auditor General, who said in April that he would terminate all government contracts with KPMG following the scandals.
“Because of the losses we’ve seen there, it has become difficult to retain those offices and so we are refocusing the business to be able to respond to some of the losses that we’ve seen in the client environment,” Dlomu said.
After the auditor general cut ties with KPMG, Barclays Africa (BGAJ.J), one of KPMG’s biggest clients, decided to stop doing business with the company.
More than 12 other clients have severed ties with KPMG since last year, with South African micro lender Finbond (FGLJ.J) last month becoming the latest firm to drop the auditor.

Barclays Africa Group Ltd16559.0

BGAJ.JJohannesburg Stock Exchange

-285.00(-1.69%)

• BGAJ.J
• FGLJ.J

TRUST AND INTEGRITY

The business units affected provide advisory and internal support services.
KPMG expects to wrap up the process by the beginning of August, Dlomu said.
“These hard decisions were necessary to put the firm on a more sustainable footing, while ensuring we continue to offer our clients the best service and support,” Dlomu said in a statement.
A number of senior KPMG partners from across its international network will be appointed to the board and executive positions at its South African unit as well as to senior client service roles, the company said.
“Today’s announcement to embed additional senior international partners into the South African leadership team is evidence of the significant investment KPMG International is providing to help ensure KPMG South Africa can continue to focus on trust, quality and integrity,” KPMG International Chairman Bill Thomas said.

Editing by Joe Brock and Susan Fenton

Our Standards:The Thomson Reuters Trust Principles.

Citi, Deutsche Bank, ANZ served with criminal cartel charges in Australia

Business News

June 5, 2018 / 9:04 AM / Updated an hour ago

Australia charges former local heads of Citi, Deutsche, ANZ in cartel case

Paulina Duran, Byron Kaye

https://www.reuters.com/article/us-anz-bank-lawsuit/australia-charges-former-local-heads-of-citi-deutsche-anz-in-cartel-case-idUSKCN1J10P1

SYDNEY (Reuters) - Australian authorities have charged the former local bosses of Citigroup Inc and Deutsche Bank AG with “criminal cartel offences” over a $2.3 billion stock issue, one of the country’s biggest cases of alleged white-collar crime. 

FILE PHOTO: A pedestrian is reflected in the window of a branch of the Australia and New Zealand Banking Group (ANZ) in central Sydney, Australia

October 25, 2017. REUTERS/Steven Saphore/File Photo

 

The tally of names disclosed on Tuesday showed the ambition of newly empowered antitrust regulator, the Australian Competition and Consumer Commission (ACCC), which revealed on Friday it planned to seek charges against the investment banks over a 2015 share-raising for Australia and New Zealand Banking Group Ltd (ANZ), plus ANZ itself.
The regulator said charges over the share placement have been laid against Citi’s former Australia head Stephen Roberts, its current local head of capital markets John McLean and its London-based head of foreign exchange trading Itay Tuchman, along with Deutsche’s former local chief Michael Ormaechea and former local capital markets head Michael Richardson.
It said charges were also laid against ANZ, its treasurer Rick Moscati, as well as the two investment banks.

Related Coverage

• 
  Australia charges investment banks with alleged cartel activity

“These serious charges are the result of an ACCC investigation that has been running for more than two years,” ACCC Chairman Rod Sims said in a statement. He declined to comment further since the matter was before the court.
ANZ, Citi and Deutsche have previously said they would defend the charges. After the names of the people being charged were released, Deutsche said it continued to believe it and its staff had acted responsibly, in the interests of clients and legally.
“Both Michael Ormaechea and Michael Richardson are highly regarded and have our full support,” a spokeswoman said in an email.
Citi, which has said the regulator appeared to have criminalized standard practices in capital raisings without warning, and ANZ were not immediately available for comment.
The charges come at difficult time for Australia’s financial sector which is facing a year-long public misconduct inquiry that has brought embarrassing headlines on an almost daily basis.
Earlier this week, the country’s biggest lender, Commonwealth Bank of Australia (CBA), paid a record A$700 million ($535 million) to settle a civil lawsuit in which it was accused of more than 50,000 breaches of anti-money laundering protocols.
The charges against ANZ and its investment banks, which can carry hefty fines and 10-year prison terms, could lead to changes in the way institutional capital raisings are handled, and do further damage to the reputation of Australian lenders.
The placement was made when Australian banks were under pressure to meet new capital requirements, which prompted ANZ and CBA to raise a combined A$8 billion in a single week.
The regulators disclosed the names of the people charged after the close of share trading on Tuesday. ANZ shares closed down 0.3 percent, in line with the broader market, but are down 7 percent since the inquiry started in February.
The ACCC has been building a team of investigators since cartel conduct was criminalized in 2009, and was further empowered last year with new laws governing competition.
The Commonwealth Director of Public Prosecutions, which brought the charges on behalf of the ACCC, said further details would not be made public until after the first court appearance in Sydney on July 3.

Reporting by Paulina Duran and Byron Kaye; Additional reporting by Aaron Saldanha and Susan Mathew; Editing by Stephen Coates and Christopher Cushing

Our Standards:The Thomson Reuters Trust Principles.

Banks liabilities are an unjust burden to the public

Exchange of emails with the Bank of England:

(Note: CBDC is Central Bank Digital Currency)

-------------------------------------

From: Ben Dyson, BoE

To: Marco Saba

Date: May 30, 2018

Dear Marco,

Sorry for the late reply. Banknotes are recorded as a liability on the central bank’s balance sheet. This is a standard accounting practice. So in the same way, CBDC would be recorded as a liability on the central bank’s balance sheet.

Ben Dyson

Manager | Digital Currencies Team | Notes Directorate

Bank of England | Threadneedle Street | London EC2R 8AH 
---------------------------
Answer:

From: Marco Saba

To: Ben Dyson, BoE

Date: June 5, 2018

Dear Ben, 

here is my suggestion for the problem of those zombie-liabilities coming from money creation:

How to solve banks liabilities: when a banker create new money it incurs a debt to the whole society (seigniorage) which is currently represented by the Treasury of the host nation. The problem is that money creation is accounted mislabelled as a generic liability (a zombie liability never paid off) i.e. labelled as "debt to depositor" in the case of a commercial bank and "currency in circulation" in the central bank books. The counterpart of this liability - a liability that should be better labelled as "seigniorage due to the Treasury" - must be accounted as an asset in the Treasury books of the host nation and paid by the banker to the same Treasury - which currently is not. So the easy solution is renaming banks liabilities as "seigniorage due to the Treasury" and at the same time we have to open a receiving account on the Treasury books ("seigniorage from money creation") where the liability will be settled and paid.

Else, unpaid banks liabilities are an unjust burden to the public and a way to hide the whole profits coming from the money creation activity.

KInd regards,

Marco Saba

Forensic accountant

Mana Bond Ltd

IMF: Crypto assets may one day reduce demand for central bank money

IMF: Crypto assets may one day reduce demand for central bank money
https://view.publitas.com/p222-14223/imf-crypto-assets-may-one-day-reduce-demand-for-central-bank-money/ 

MONEY, TRANSFORMED

MONETARY POLICY IN THE DIGITAL AGE

Crypto assets may one day reduce demand for central bank money

June 2018 | FINANCE & DEVELOPMENT 13

The global financial crisis and the bailouts of major financial institutions renewed skepticism in some quarters about central banks’ monopoly on the issuance of currency.

Such skepticism fueled the creation of Bitcoin and other crypto assets, which challenged the paradigm of state-supported currencies and the dominant role of central banks and conventional institutions in the financial system (He and others, 2016).

Twenty years ago, when the Internet came of age, a group of prominent economists and central bankers wondered whether advances in information technology would render central banks obsolete (King 1999). While those predictions haven’t yet come to pass, the rise of crypto assets has rekindled the debate. These assets may one day serve as alternative means of payment and, possibly, units of account, which would reduce the demand for fiat currencies or central bank money. It’s time to revisit the question, will monetary policy remain effective in a world without central bank money (Woodford 2000)?

For the time being, crypto assets are too volatile and too risky to pose much of a threat to fiat currencies. What is more, they do not enjoy the same degree of trust that citizens have in fiat currencies: they have been afflicted by notorious cases of fraud, security breaches, and operational failures and have been associated with illicit activities.

Addressing deficiencies

But continued technological innovation may be able to address some of these deficiencies. To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies. They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age.

What are crypto assets? They are digital representations of value, made possible by advances in cryptography and distributed ledger technology. They are denominated in their own units of account and can be transferred peer to peer without an intermediary.

Crypto assets derive market value from their potential to be exchanged for other currencies, to be used for payments, and to be used as a store of value. Unlike the value of fiat currencies, which is anchored by monetary policy and their status as legal tender, the value of crypto assets rests solely on the expectation that others will also value and use them.

Since valuation is largely based on beliefs that are not well anchored, price volatility has been high.

Deflation risk

Some crypto assets, such as Bitcoin, in principle have limited inflation risk because supply is limited.

However, they lack three critical functions that stable monetary regimes are expected to fulfill: protection against the risk of structural deflation, the ability to respond flexibly to temporary shocks to money demand and thus smooth the business cycle, and the capacity to function as a lender of last resort.

But will they be more widely used in the future?

A longer track record may reduce volatility, boosting further adoption. And with better issuance rules—perhaps, “smart” rules based on artificial intelligence—their valuation could become more stable. “Stable” coins are already appearing: some are pegged to existing fiat currencies, while others attempt issuance rules that mimic inflation- or price-targeting policies (“algorithmic central banking”).

As a medium of exchange, crypto assets have certain advantages. They offer much of the anonymity of cash while also allowing transactions at long distances, and the unit of transaction can potentially be more divisible. These properties make crypto assets especially attractive for micro payments in the new sharing and service-based digital economy.

And unlike bank transfers, crypto asset transactions can be cleared and settled quickly without an intermediary. The advantages are especially apparent in cross-border payments, which are costly, cumbersome, and opaque. New services using distributed ledger technology and crypto assets have slashed the time it takes for cross-border payments to reach their destination from days to seconds by bypassing correspondent banking networks.

So we cannot rule out the possibility that some crypto assets will eventually be more widely adopted and fulfill more of the functions of money in some regions or private e-commerce networks.

Payment shift

More broadly, the rise of crypto assets and wider adoption of distributed ledger technologies may point to a shift from an account-based payment system to one that is value or token based (He and others 2017). In account-based systems the transfer of claims is recorded in an account with an intermediary, such as a bank. In contrast, value- or token-based systems involve simply the transfer of a payment object such as a commodity or paper currency. If the value or authenticity of the payment object can be verified, the transaction can go through, regardless of trust in the intermediary or the counterparty.

Such a shift could also portend a change in the way money is created in the digital age: from credit money to commodity money, we may move full circle back to where we were in the Renaissance! In the 20th century, money was based predominantly on credit relationships: central bank money, or base money, represents a credit relationship between the central bank and citizens (in the case of cash) and between the central bank and commercial banks (in the case of reserves). Commercial bank money (demand deposits) represents a credit relationship between the bank and its customers. Crypto assets, in contrast, are not based on any credit relationship, are not liabilities of any entities, and are more like commodity money in nature.

Economists continue to debate the origins of money, and why monetary systems seem to have alternated between commodity and credit money throughout history. If crypto assets indeed lead to a more prominent role for commodity money in the digital age, the demand for central bank money is likely to decline.

Monopoly supplier

But would this shift matter for monetary policy? Would diminished demand for central bank money reduce the ability of central banks to control short-term interest rates? Central banks typically conduct monetary policy by setting short-term interest rates in the interbank market for reserves (or clearing balances they keep with the central bank). According to King (1999), ceasing to be the monopoly supplier of such reserves would indeed deprive central banks of their ability to carry out monetary policy.

Economists disagree about whether massive adjustments in central bank balance sheets would be necessary to move interest rates in a world where central bank liabilities ceased to perform any settlement functions. Would the central bank need to buy and sell a lot of crypto assets to move interest rates in a crypto world?

Regardless of such disagreements, the ultimate concern is similar: “The only real question about such a future is how much the central banks’ monetary policies would matter” (Woodford 2000).

To Benjamin Friedman, the real challenge is that “the interest rates that the central bank can set . . .become less closely—in the limit, not at all—

connected to the interest rates and other asset prices that matter for ordinary economic transactions” (Friedman 2000).

In other words, if central bank money no longer defines the unit of account for most economic activities—and if those units of account are instead provided by crypto assets—then the central bank’s monetary policy becomes irrelevant. Dollarization in some developing economies provides an analogy.

When a large part of the domestic financial system operates with a foreign currency, monetary policy for the local currency becomes disconnected from the local economy.

Central banks should strive to make fiat currencies better and more stable units of account. Central banks must maintain the public’s trust in fiat currencies and stay in the game in a digital, sharing, and decentralized service economy

Competitive pressure

How should central banks respond? How can they forestall the competitive pressure crypto assets may exert on fiat currencies?

First, they should continue to strive to make fiat currencies better and more stable units of account.

As IMF Managing Director Christine Lagarde noted in a speech at the Bank of England last year, “The best response by central banks is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.” Modern monetary policy, based on the collective wisdom and knowledge of monetary policy committee members—and supported by central bank independence—offers the best hope for maintaining stable units of account. Monetary policymaking can also benefit from technology: central banks will likely be able to improve their economic forecasts by making use of big data, artificial intelligence, and machine learning.

Second, government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage crypto assets may derive from lighter regulation. That means rigorously applying measures to prevent money laundering and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions.

Third, central banks should continue to make their money attractive for use as a settlement vehicle. For example, they could make central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves. Such central bank digital currency could be exchanged, peer to peer in a decentralized manner, much as crypto assets are.

Safeguarding independence

Central bank digital currency could help counter the monopoly power that strong network externalities can confer on private payment networks. It could help reduce transaction costs for individuals and small businesses that have little or costly access to banking services, and enable long-distance transactions. Unlike cash, a digital currency wouldn’t be limited in its number of denominations.

From a monetary policy perspective, interest-carrying central bank digital currency would help transmit the policy interest rate to the rest of the economy when demand for reserves diminishes.

The use of such currencies would also help central banks continue to earn income from currency issuance, which would allow them to continue to finance their operations and distribute profits to governments. For central banks in many emerging market and developing economies, seigniorage

is the main source of revenue and an important safeguard of their independence.

To be sure, there are choices and policy trade-offs that would require careful consideration when it comes to designing central bank digital currency, including how to avoid any additional risk of bank runs brought about by the convenience of digital cash. More broadly, views on the balance of benefits and risks are likely to differ from country to country, depending on circumstances such as the degree of financial and technological development.

There are both challenges and opportunities for central banks in the digital age. Central banks must maintain the public’s trust in fiat currencies and stay in the game in a digital, sharing, and decentralized service economy. They can remain relevant by providing more stable units of account than crypto assets and by making central bank money attractive as a medium of exchange in the digital economy

DONG HE

is deputy director of the IMF’s Monetary and Capital Markets Department.

This article draws on “Virtual Currencies and Beyond: Initial Considerations,” January 2016 IMF Staff Discussion Note 16/03, by Dong He, Ross Leckow, Vikram Haksar, Tommaso Mancini Griffoli, Nigel Jenkinson, Mikari Kashima, Tanai Khiaonarong, Céline Rochon, and Hervé Tourpe.

References:

Friedman, Benjamin M. 2000. “Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking.” International Finance 3 (2): 261–72.

Goodhart, Charles. 2000. “Can Central Banking Survive the IT Revolution?” International Finance 3 (2): 189–209.

He, Dong, Ross Leckow, Vikram Haksar, Tommaso Mancini Griffoli, Nigel Jenkinson, Mikari Kashima, Tanai Khiaonarong, Céline Rochon, and Hervé Tourpe. 2017. “Fintech and Financial Services: Initial Considerations.” IMF Staff Discussion Note 17/05, International Monetary Fund, Washington, DC.

King, Mervyn. 1999. “Challenges for Monetary Policy: New and Old.” Speech delivered at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, WY, August 27.

Woodford, Michael. 2000. “Monetary Policy in a World without Money.” International Finance 3 (2): 229–60