Friday, October 20, 2017

North Korea Threat Assessment Recap - Update from Jim Rickards

On Thursday October 19th, the Foundation for Defense of Democracies hosted an event featuring CIA Director Mike Pompeo and National Security Adviser Lt. General H.R. McMaster. This was an invitation only event that people like Jim Rickards attended. Jim kindly provided an update on his North Korea analysis for readers here after the meeting held yesterday (see below).

The event was broadcast live (see archive here) so I was able to see what Director Pompeo and Lt. General McMaster were willing to say about North Korea in a pubic forum such as this. Below I have listed some bullet point from each speaker on this topic:

Director Pompeo

- North Korea is continuing to move towards having the capability to launch a nuclear weapon that can reach the United States

- The US believes that in the next few months North Korea may well reach the point where they could launch such an attack (although a distinction was made between the ability to launch one weapon vs. the ability to launch a more robust attack)

- President Trump has given a clear mission to the CIA and all US agencies tasked with preventing such an attack on the US -- the US is dedicated to preventing North Korea from reaching the capability to launch a nuclear weapon that can reach the US (or its allies)

- Diplomatic efforts continue and will continue to try and persuade North Korea to abandon its nuclear weapons program. At this time, it is the assessment of US intelligence agencies that North Korea does not intend to abandon the program and views it as critical to survival of the current North Korean regime

- the US is encouraged by some of the efforts China is making to defuse the situation and will monitor closely what happens next with China

My overall impression of his public comments: Pretty much in line with what Jim Rickards has told us here earlier. The US will continue to do what it can to avoid a war, however, the time is running out to solve the issue diplomatically and we can expect that a military option could be implemented in less than a year from now if nothing changes in North Korea. I did get the sense in this discussion that the US does not view the regime in North Korea as crazy, but rather that they are pursuing a strategy they believe is in the interest of their national security. The US just believes they are miscalculating with that strategy.

Lt. General McMaster

In the Q&A portion of his session, Lt. General McMaster confirms that the US is "running out of time" to solve the issue without a military option, but does express hope that "unprecedented world cooperation" can still stave that off. He repeats that if North Korea does not change, US policy is clear that the US will not allow North Korea to obtain a nuclear weapon that can threaten the US.

Jim Rickards Updated Analysis on North Korea just provided this morning (10-20-17):


Here is my updated assessment of the North Korea situation based on the meeting with Pompeo and McMaster:

Four possibilities:

1. Death of Kim Jong Un and regime change before a war: 20%
2. Sanctions work, and Kim Jong Un verifiably gives up his weapons programs and begins to denuclearize: 20%
3. Preventive attack by the United States before March 31, 2018: 60%
4. U.S. accepts a nuclear armed North Korea: 0%

I hope that's helpful.

All best,

Added note: CFR President Richard N. Haass seems to agree with Jim 

Tuesday, October 17, 2017

IBM Announces Partnership with KlickEx and Stellar on BlockChain Payments System

IBM has released this news notice that explains its partnership with KlickEx and Stellar to implement what could be a game changing new global payments system based upon blockchain and other innovative technology. We have covered KlickEx here as an up and coming Fintech startup based in New Zealand. This news confirms that KlickEx is ready to move forward with leading payments systems technology alongside major partners.

Below is the press release from IBM that includes links which readers can use to learn more about the IBM Blockchain initiative, KlickEx, and Stellar. KlickEx posted the news release here and Stellar added some comments here. I used bold underline type for what I felt were some key points in the news release.


IBM--KlickEx--Stellar @ Sibos 2017

TORONTO - 16 Oct 2017: SIBOS: IBM (NYSE: IBM) today announced a new blockchain banking solution that will help financial institutions address the processes of universal cross-border payments, designed to reduce the settlement time and lower the cost of completing global payments for businesses and consumers. Using IBM Blockchain, and in collaboration with technology partners and KlickEx Group, the solution is intended to improve the speed in which banks both clear and settle payment transactions on a single network in near real time.

Today, making international payments can be costly, laborious and error-prone. Transactions in different currencies can require multiple intermediaries and take days or weeks to complete. According to the World Bank, initiatives to modernize payments and provide financial access could improve the flow of currency and commerce, and help achieve the goal of extending financial services to one billion people by 2020*.

The solution is already processing live transactions in 12 currency corridors across the Pacific Islands and Australia, New Zealand and the United Kingdom. Using a blockchain distributed ledger, all appropriate parties have access and insight into the clearing and settlement of financial transactions. It is designed to augment financial flows worldwide, for all payment types and values, and allows financial institutions to choose the settlement network of their choice for the exchange of central bank-issued digital assets.

For example, in the future, the new IBM network could make it possible for a farmer in Samoa to enter into a trade contract with a buyer in Indonesia. The blockchain would be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, obtain letters of credit, and finalize transaction terms with immediate payment, conducting global trade with transparency and relative ease.
IBM has convened an initial group of diverse banking leaders as part of the development and deployment process, including Banco Bilbao Vizcaya Argentaria, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank Permata, Bank Rakyat Indonesia, Kasikornbank Thailand, Mizuho Financial Group, National Australia Bank, Rizal Commercial Banking Corp. (RCBC) Philippines, Sumitomo Mitsui Financial Group, TD Bank, Wizdraw (HK) of WorldCom Finance, and other financial institutions.
 “With the guidance of some of the world’s leading financial institutions, IBM is working to explore new ways to make payment networks more efficient and transparent so that banking can happen in real-time, even in the most remote parts of the world,” said Bridget van Kralingen, Senior Vice President of IBM Industry Platforms. “Making distributed ledger technologies more interoperable is the latest example of IBM’s leadership driving the rapid advancement of blockchain.”  
"TD Bank is pleased to participate along with fellow banking leaders to observe how IBM Blockchain can support more secure and effective payments solutions," said Rizwan Khalfan, EVP and Chief Digital and Payments Officer, TD Bank. "We're focused on innovation that adds value for our customers and our business, and blockchain presents a tremendous opportunity to transform and enhance payment systems, enabling us to continue to evolve the products and services we can offer."
In keeping with IBM's commitment to open source, the solution is run from the IBM Blockchain Platform on Hyperledger Fabric and was built in collaboration with, a non-profit organization and associate member of Hyperledger, and KlickEx Group, a regional financial services company in the Pacific region. Stellar is an open-source blockchain network that is purpose-built for the issuance and exchange of digital assets. Digital assets are issued on the Stellar network as a foreign exchange bridge to allow for near real time settlement. KlickEx Group serves as the founding financial institution for the region, servicing banks, retail clients and consumers using this new network.
IBM will continue to advance the solution with the goal of expanding capabilities in order to support central bank-issued digital currencies, securities, bonds and structured financial assets. IBM Blockchain provides high performance orchestration to move payments among parties. Each payment is immutable once recorded, and settlement instructions are provided via smart contracts on Hyperledger Fabric. Initially, Stellar will provide the network and digital asset to facilitate the settlement of transactions cleared on Hyperledger.
"This new innovation and collaboration represents a significant milestone for Stellar as well as the financial technology industry as a whole," said Jed McCaleb, co-founder of Stellar. "We are using blockchain technology in production to facilitate cross-border payments in multiple integrated currency corridors. Currently, cross-border payments tend to take up to several days to clear. This new implementation is poised to start a profound change in the South Pacific nations, and once fully scaled by IBM and its banking partners, it could potentially change the way money is moved around the world, helping to improve existing international transactions and advancing financial inclusion in developing nations." 
The network is currently in use by Advanced Pacific Financial Infrastructure for Inclusion (APFII) members, a public-private partnership initially funded by the United Nations and SWIFT. It is expected to process up to 60 percent of all cross-border payments in the South Pacific's retail foreign exchange corridors including Australia, New Zealand, Fiji, Samoa and Tonga by early next year. Commercial banks such as Banco Bilbao Vizcaya Argentaria, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank Permata, Bank Rakyat Indonesia, Kasikornbank Thailand, Mizuho Financial Group, National Australia Bank, Rizal Commercial Banking Corp. (RCBC) Philippines, Sumitomo Mitsui Financial Group, TD Bank, and Wizdraw (HK) of WorldCom Finance will be invited to join the network and help it expand in different parts of the world beginning in 2018.
“This is the first time anyone has made blockchain work at an institutionally viable scale,” said Robert Bell, Chairman of APFII and founder of KlickEx Group. “Through KlickEx, the Pacific has had relatively low-cost, real-time, multi-currency payments for most of the past decade, and this project was a natural next step following our work to create seamless and borderless payments across the Pacific. We look forward to the results with using IBM Blockchain as we continue to push forward with our mission to remove payment friction across borders.”
This production blockchain network with KlickEx and Stellar is one of many blockchain projects underway by IBM in financial services including foreign exchange payments netting, private equity administration, securities lending and trade finance.
About IBM
IBM is the leader in open-source blockchain solutions built for the enterprise. As an early member of Hyperledger, an open source collaborative effort created to advance cross-industry blockchain technologies, IBM is dedicated to supporting the development of openly-governed blockchains. IBM has worked with more than 400 clients across financial services, supply chains, IoT, risk management, digital rights management and healthcare to implement blockchain applications. For more information about IBM Blockchain, visit

About KlickEx is an award winning regional cross-border payments system delivering financial infrastructure for emerging markets. It has been responsible for dramatic uptake in digital financial services in unbanked regions of the world, and lowering costs for banks, central banks and consumers in low liquidity currencies. KlickEx is also a regional compliance system, active in reducing compliance costs for countries linked to the system. KlickEx owns many of the Pacific's largest Money Transfer Operations, and is the region's largest clearing hub, accounting for over 60% of annual retail foreign exchange transactions (by value and volume) in key corridors. Its key presence is in the Pacific and Europe, and it is a founding member of processing more than 775,000 transactions per second, per billion of population.

About is a Silicon Valley based nonprofit organization that supports the Stellar network, a free, open-source network that connects diverse financial systems and lets anyone build low-cost financial services—payments, savings, loans, insurance—for their community. The Stellar network enables money to move directly between people, companies and financial institutions as easily as email. This interconnectivity means more access for individuals, lower costs for banks, and more revenue for businesses. For more on, visit

*Source: World Bank UFA2020 Overview: Universal Financial Access by 2020. April 20, 2017.


My added comments: This new collaboration between IBM, KlickEx, and Stellar makes a lot of sense once you dig into the goals of all three organizations. IBM clearly desires to be a global leader in the expansion of the use of blockchain technology in many different sectors. Nothing is more fundamentally important than a global payments system that anyone can use on mobile device at very low cost to complete payment transactions around the world. We have talked about this concept many times here on this blog. 

KlickEx provides years of experience in delivering this type of payments system on a regional basis in the South Pacific. The CEO of KlickEx, Robert Bell, is a very passionate advocate for financial inclusion and low cost remittances and has been recognized around the world for his efforts in that area. It only makes sense that he would want to join up with IBM to deliver a low cost payments system on a broader platform than just the South Pacific. We felt like when we first learned about KlickEx that it would be a company to watch and this big step forward for KlickEx is an example why. I would expect KlickEx to continue its efforts to assist in spreading low cost payments and cross border transactions to more and more places around the globe based on the real world experience they have gained over the last decade in the South Pacific. I would also expect that this could be the start of a process that can lead to some initial central bank digital currencies, perhaps starting in Singapore (seems IMB's Jesse Lund agrees).

All you have to do is look at the Stellar mission and mandate to see why they would want to be involved with this project. Once again, they are dedicated to doing what they can to bring low cost payments and money transfers to the world. This is particularly important for workers who are un-banked or who may be sending remittances across borders back to family members in another country. 

The common thread you see in all three of the organizations involved in this project if you look into them is that they desire to make the financial system accessible to those who cannot access it now and to make the movement of money for payments and transfers a much more efficient and low cost operation for everyone involved. 

We note that IBM states in the press release that this system is designed to be "interoperable" with existing banks and central banks . This is a huge point that should not be overlooked.  

Robert Bell (KlickEx) says this:

“This is the first time anyone has made blockchain work at an institutionally viable scale,”

Robert helped present this concept at the Sibos conference in Toronto, Canada alongside Jesse Lund of IBM and Jed McCaleb of Stellar.

Widespread adoption of this by both banks and central banks should not be surprising over the coming months and years. This is the type of thing that can lead to more major monetary system change like we watch for here over time. 

This news attracted quite a bit of attention globally as can be seen from these articles:


Business Insider

Silicon Republic

IBS Intelligence

Computer World

Enterprise Times (UK)  "IBM becomes the blockchain monster"


City A.M.

FX Week

Coin Desk

ZD Net

Banking Technology

Banking Business Review


Added note:

"Whether it’s Bitcoin, or something better that soon follows like a central bank issuance, digital currencies will offer tangible improvements to financial services, and especially international payments."       . . . . . .

"Anyone with a mobile device will be able to hold a digital bank account (truth is, they already can). Hopefully this will lead to a reduction in corruption as barriers between people and money disappear, enabling peer-to-peer philanthropy and direct financial aid. No place on earth will be out of reach."

Monday, October 16, 2017

Robert Pringle - Ten Year Retrospective

Robert Pringle has posted a series of articles on his blog he calls a "10 Year Retrospective". He discusses some lessons he feels we can learn from the last global financial crisis. Below are links to each of the three parts in the series with a brief excerpt from each part just below the link.


"The financial crisis showed up the defects of monetary models. These in turn reflected a flawed idea of money. That is why central banks failed to anticipate the crisis and could not deal with it effectively when it arrived. That is the message of The Money Trap."

The lead-up to the crisis was marked by the near-universal adoption of inflation targeting. This became sacrosanct as the framework for monetary policy ( implicit in the case of the Federal Reserve). It became the nearest we had to a global monetary standard.  The first lessons of the crisis is that this model was deeply deceptive."         . . . .

"A leading economist has predicted that central banks will  not remain independent much longer. His forecast was made  at  a Bank of England conference called to celebrate – yes – 20 years of independence. Guests included Mrs Theresa May, the Prime Minster. It was opened by the Governor, Mark Carney, who drew a different, but equally startling, lesson from the crisis."    . . . .
. . . .
"John Taylor (he of the Taylor Rule) advocates an international reform whereby each central bank would announce and agree to abide by its own rules for monetary policy – an international move to a rule-based system. He understands, as few others do, that a fatal flaw in QE has been its adverse international repercussions."   . . . .
My added comments: I try to feature anything new that Robert Pringle posts to his blog (The Money Trap). He has years of experience in working with central bankers around the world and his insights are always valuable. They also provide a rare glimpse into the world of central banking as seen from the inside. 

Saturday, October 14, 2017

WSJ - Have You Heard of IMF Coin?

The Wall Street Journal now runs this article that once again talks about things we have been covering and talking about here for some time. Below are some excerpts.


Forget Bitcoin. Have You Heard of IMFcoin?

IMF would like its special drawing rights to have a digital future, and has spent the past year thinking of a broader role for it

"Forget Bitcoin, think IMFcoin. The head of the International Monetary Fund has been musing about the future of money, and thinks there is a decent chance it will come from the guardian of the world’s monetary system.

Christine Lagarde, IMF managing director, held up the organization’s special drawing rights (SDRs) as having a possible digital future at a Bank of England forum last week, and put what she said was a “question mark” over whether SDRs could replace existing international currencies. “It’s not a far-fetched hypothetical,” she said, and the IMF needs to be ready."

. . . .

"There is little chance U.S. politicians will want to give up what a French finance minister once called the “exorbitant privilege” of the dollar, no matter what Ms Lagarde, another former French finance minister, might suggest. (note: this comment is from the author of the WSJ article, the following sentence is attributed to Director Lagarde and the bold emphasis is mine) As she noted, the IMF would need a “geopolitical situation that would be propitious” for the changes she is speculating about to happen."

My added comments: I will just point out again that all this is something we have talked about here for some time now. This older article and this very recent article are examples.

At this point maybe I should explain what prompted me to write on this topic since it is now appearing in mainstream media and seemingly everywhere. I first began to think about this idea when I saw a demonstration presentation (see this video) that talked about the idea of an asset backed cryptocurrency that could be used by banks and central banks (and perhaps even the IMF) in the existing system some day. I began to to research this concept and discovered that the idea of using the SDR in a different way than it is used currently outside the IMF has been discussed at times over the years. I learned that even now there are so called "private SDRs" outside the IMF that can be used. However, these are not official SDR's used by IMF member nations. Instead they are more like someone simply owning an investment in the 5 currencies that make the current SDR basket in the same ratio as they are used in that basket. Not really an SDR and certainly not any kind of legal tender currency of its own. An 'SDR denominated bond' has to eventually be converted back into some kind of national legal tender currency to utilize the funds in the private sector.

But thinking about the concept, it seemed like it could be possible some day for the IMF to consider using the SDR in a new way (more like a real currency anyone could own) and that the new technologies arising in the fintech arena might be considered as part of that process. Also, I have followed Jim Rickards now for many years and he has never wavered in his prediction that the SDR would likely be put forward as a potential replacement for the US dollar in the next major global crisis which he also predicts will eventually arrive.

All this led me to dig into the topic of the SDR and try to find as much accurate information on it as I could in the event these forecasts do pan out. I created this page on this blog to archive what I could find and have written about here.

These articles include a lot of direct input from Dr. Warren Coats who at one time was the head of the SDR Division at the IMF. I am pretty sure you will not find a more informed expert on the SDR anywhere on the earth than Dr. Coats. 

I have always wondered and also speculated about whether the IMF might some day consider a "digital version of the SDR" given all that I mentioned above. Now we have IMF Director Lagarde talking about it openly in a public speech and this article in the Wall Street Journal discussing the idea. I feel like this is confirmation that the topic is important (as I have tried to emphasize here for some time) and that the information that has been presented here is pretty accurate as best I could make it. I don't claim to be an expert, but I have been fortunate to get direct input from some people who I do view as experts. 

So, a question that may arise is if I believe this is going to happen and also if it will be a good thing if it does happen. The only honest answer I can give is, "I don't know", to both questions. I don't have any reason to believe right now that we are close to some kind of digital version of the SDR (blockchain based or not) that would replace the US dollar. As far as I know, while we now can confirm the idea of a digital version of the SDR has been at least mentioned by Director Lagarde, there is no indication that the mechanics to actually implement such a thing currently exist at the IMF. 

To get to that point, all kinds of things would need to happen that have not yet happened as far as I know:

- the IMF would have to have some kind of system in place that could implement using the SDR in this way. This is a formidable task and would require a lot of testing etc. As far as I know, nothing has even been started along those lines (although some individual central banks are heading in that direction)

- changing the way the SDR is used like this would require approval of the IMF member nations

- the US retains veto power over any votes taken at the IMF along these lines

-  the only public statement I know of from the IMF on this is that they are currently studying whether or not to promote a broader role for the SDR in the monetary system. 

- no public report on this study has been released as far as I know

- the best information I have is that perhaps next year the IMF may go forward with some kind of promotion for broader use of the SDR based on their internal research, but as far as I know, that would more likely be the "private SDR" mentioned above and not the official SDR used by member nations

One statement that Director Lagarde is quoted as making in this WSJ article did catch my attention (in bold underline below):

"There is little chance U.S. politicians will want to give up what a French finance minister once called the “exorbitant privilege” of the dollar, no matter what Ms Lagarde, another former French finance minister, might suggest. As she noted, the IMF would need a “geopolitical situation that would be propitious” for the changes she is speculating about to happen."

That last sentence attributed to Director Lagarde is almost word for word what we have said here now for quite some time. We have said that absent a new major global crisis, these kinds of changes are more likely to take place over a long time period because of the difficulty in getting global cooperation from individual central banks beholden to their own countries and because the political will to make these kinds of changes does not appear to be present at this time. We speculated that under  severe crisis conditions, things could possibly change and lead to faster consideration of these kinds of changes. This statement attributed to Director Lagarde seems to confirm that analysis as best I can tell.

As to whether this kind of change would be good or not, I have no idea. I know that Dr. Warren Coats has a proposal on the table to use the SDR in a new way and we have covered that here extensively. I feel completely confident that Dr. Coats is deeply concerned that any kind of proposal to use the SDR as a global reserve currency be based upon strict rules (Currency Board rules) that would not allow the SDR to simply be created at will by the issuer (and likely stimulate inflation). If the SDR is proposed as a global reserve currency some day, I do hope that the proposal Dr. Coats has put forward will be the basis for such a plan because I know he has put years of study into the idea and understands that a currency must be stable in value over time to serve the public well.

All kinds of other questions have been raised such as whether the SDR should be fully or partially backed by gold for example. The IMF does own gold reserves so they could do that (but I think gold would need to be at a higher price). Dr. Coats prefers to see a basket of goods used rather than just gold because he believes that would be more stable over time.

I certainly do not know what would work best or if any of this will actually ever happen. The goal here is to try and accurately inform and educate readers on this topic so that whatever opinions they form will be based on accurate information. Some day a proposal to do this (use the SDR as global reserve currency) may be put forward. It is better to understand this topic than to not understand it if that day ever does arrive. I see a lot of misinformation on this topic for sure, so I try very hard to get the information presented here as accurate as I can. You can review all the information archived on this blog page.

Added note: I had several experts review this article and no significant changes were suggested to me.

CNBC runs this article on the same topic.

Tuesday, October 10, 2017

Greg Hunter Interview with Jim Rickards

In this hour long interview with Greg Hunter of Watchdog USA, Jim Rickards touches on a variety of topics and provides an update on North Korea which has not changed from his previous analysis we reported here. Below are some excerpts from the summary of the interview.


"Four time best-selling financial book author James Rickards says don’t get too comfortable with the record high stock prices. Rickards explains, “I think the markets will have a very violent reversal in late November or early December.  Let me be specific about why because I never make claims like this without backing it up. . . . Here’s what’s going on.  Right now, markets are priced for a Fed rate hike in December. . . . The stock market is interpreting this rate hike as economic strength . . . everything is set for a violent reversal because the Fed is not going to hike interest rates in December.”

. . . .

"So, what happens if Rickards is correct and the Fed does not raise rates? Rickards says, “When that happens, and I think it will happen . . . all of a sudden, the dollar is going to get weaker, the euro is going to get stronger, gold is going to go up and bonds are going to rally.  So, there will be a lot of big market effects.  I am not talking the end of the world . . . . I am not talking about a total meltdown.  I am talking about a violent repricing of some major commodities and bonds . . . because the market thinks the Fed is going to raise, and they’re not.”

Is there a danger in October as many believe there could be? Rickards says “yes,” and it comes from increased tensions with North Korea.  Rickards says, “We have a window from October 10th to October 21st.  What is the significance of that window?  October 10th is the anniversary of the communist party of North Korea.  Kim Jong Un is getting ready to test more missiles. . . . We have two catalysts.  The anniversary on October 10th and war games (with South Korea) on October 21st.  In that window is when I expect one or more missile tests.  That’s going to be another wake up call to the markets.  The markets are sleepwalking . . . they don’t understand this war is coming, and it is coming.  A shooting war, a pre-emptive war, a kinetic war with the United States against North Korea, I do expect by mid-2018. . . . Kim Jong Un thinks we are bluffing.  We are not.”

My added comments: One thing I noted in this interview is that Jim laid out a path for the US dollar to be replaced as the global reserve currency that he describes as being a long term process playing out over many years. This is in line with what we have been saying here as well for some time. 

So this is good confirmation that such a process is likely to unfold over a longer time frame unless some kind of new global crisis speeds the process up as we have been reporting here. As noted above, Jim repeats in this interview that he sees the US engaged in a shooting war with North Korea by mid 2018. He has stated in public interviews that will be a likely trigger for the next major financial crisis he has predicted for many years. In this interview, he also discloses that he will participate soon in a meeting by invitation only with the CIA Director and key US Defense Department officials. For these reasons, we encourage readers to follow events related to North Korea closely.

Also, here is a link to another even more recent interview with Jim Rickards that covers much of the same ground, but he again restates clearly that he believes the US will go to war with North Korea by mid next year. So far the markets are obviously not pricing in this as a likely event. But again, I emphasize this situation should be closely monitored. Jim does add that you should watch for any news indicating the US is advising US civilians to evacuate from South Korea. That would be a strong signal that war would follow soon after in his view.
10-11-17: Here are some related news articles out this morning. This is what I mean by closely monitoring events.

Trump Summons Generals to White House war room

Britain makes battle plans for war with North Korea

US Sends second nuclear warship to the area

North Korean cyber weapons

North Korea targeted US electric power companies

Washington Post article offers a more hopeful outlook


North Korea Missle Launch Imminent?

Monday, October 9, 2017

Central Bank Digital Currency and the Future of Monetary Policy - (Bordo & Levin)

A thank you to Robert Pringle for pointing me to this article by Michael Bordo and Andrew Levin. It is another look at the potential future prospects for central bank digital currencies that I think is a more realistic approach than many I see out there in various media. Below are a couple of excerpts (underline is mine).

"A number of major central banks are actively exploring the initiation of sovereign digital currencies. In this analysis, we consider how a central bank digital currency (CBDC) can transform all aspects of the monetary system and facilitate the systematic and transparent conduct of monetary policy. Building on a long strand of the literature in monetary economics, we formulate a set of overarching design principles. In particular, we find a compelling rationale for establishing a CBDC that serves as a stable unit of account, a practically costless medium of exchange, and a secure store of value. In particular, the CBDC should be interest-bearing, and the central bank should adjust that interest rate to foster true price stability. "

. . . .

"In contrast, a number of central banks are actively exploring the initiation of sovereign digital currencies that would serve as legal tender and could be used by anyone. In contrast to bitcoin, the value of the central bank’s digital currency would be fixed in nominal terms. Moreover, the central bank’s digital currency could be implemented using an account-based system, thereby avoiding the resource-consuming “mining” operations involved in generating virtual currencies like bitcoin. Allowing private individuals and firms to hold accounts directly at the central bank is by no means unprecedented; indeed, a number of major central banks have had these sorts of arrangements in the past."

My added comments: 

A few key points from this article (and ideas we have covered here on this blog):

- they talk about accounts that individual private citizens can hold at central banks

- the central bank digital currency should pay interest (but could also go negative in times of systemic duress)

- the central bank digital currency should not use "resource-consuming "mining" operations

- they call for issuance of the currency based on demand from the public and using a rules based system

Added note:

Central bank critics and cynics will see this paragraph in this article:

"As discussed in Goodfriend (2016), the launching of a central bank digital currency can be accompanied by an accelerated obsolescence of paper currency. Indeed, once the central bank’s digital currency is widely used as a form of electronic payment, the demand for holding paper currency and coins would quickly diminish, especially if deposits and withdrawals of cash are associated with substantial fees by the central bank and private financial institutions. Of course, those individuals who preferred to engage in relatively anonymous transactions would remain free to use virtual currencies or other forms of payment."

and will surely view this proposal as an attack on the use of cash and financial privacy in financial transactions. 

However, society is already moving in this direction for the most part, so perhaps this will become more accepted by the public over time. Most of the younger generation is already used to using some form of electronic payment for just about everything.

Also, if smaller, less material cash transactions many people would still use for regular business were exempt from such fees, most people probably would not notice a lot of difference in how they do things now. The issue of financial privacy is likely to be a hot topic of debate for sure regardless. 

Thursday, October 5, 2017

Christine Lagarde - IMF Should Be Open to Considering a Digital Version of the SDR

In this new speech at the Bank of England in London, IMF Director Christine Lagarde asks the audience to fast forward to the year 2040 to see what the world of central banking might look like. Interestingly, most everything she talks about in this future look has been covered here on this blog for some time. Below are some excerpts and then a few added comments.


. . . . 

"And much has changed for the bankers and policymakers here in the City of London. But that is only the beginning. Let us spin the hands ofBig Ben forward to 2040 to catch a glimpse of their world. We might see that:
· Cars have disappeared, because people are moving about in hovering drones, or “pods,” which elegantly avoid each other in the morning rush hour.
· One of those pods carries the central bank governor, who recently started her second term. As part of her morning routine, she swipes through a hologram of news videos curated by a digital assistant, before arriving at Threadneedle Street.
· The governor disembarks, walks up to the columned fa├žade, opens the door and…
Who will she encounter inside the building? Are there economists sitting at desks, debating policy choices around a table? Or is there an intelligent machine making decisions, setting rates, and issuing money?
In other words, how will fintech change central banking over the next generation? That is the focus of my remarks today."
. . . . 
"Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.
Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.
For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.
But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies."
. . . . 
"So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve."
. . . . 
"Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender."
. . . . 
Cooperation is key
"To make things smoother—at least a bit—we need dialogue. Between experienced regulators and those regulators that are just beginning to tackle fintech. Between policymakers, investors, and financial services firms. And between countries.
Reaching across borders will be critical as the focus of regulation widens—from national entities to borderless activities, from your local bank branch to quantum-encrypted global transactions.
Because of our global membership of 189 countries, the IMF is an ideal platform for these discussions. Technology knows no borders: what is home, what is host? How can we avoid regulatory arbitrage and a race to the bottom? This is about the IMF’s mandate for economic and financial stability, and the safety of our global payments and financial infrastructure.
The stakes—and gains—from cooperation are high. We want no holes in the global financial safety net, however much it gets stretched and reshaped.
I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR.
In other words, the IMF is in for the pod-ride."
. . . . 
As our pod journey comes to an end, some of you may wonder about my upbeat tone. For many, this new world of central banking is less Mary Poppins, and more Aldous Huxley: a “brave new world,” much like the one described in Huxley’s famous novel.
I believe that we—as individuals and communities—have the capacity to shape a technological and economic future that works for all. We have a responsibility to make this work.
That is why I prefer Shakespeare’s evocation of the brave new world in The Tempest: “ O wonder! How many goodly creatures are there here! How beauteous mankind is! O brave new world .” 
My added comments: It's interesting to see Director Lagarde talking about the future of virtual currencies in ways similar to what we have talked about here. When we first wrote about this concept (a central bank or IMF digital currency everyone could own), it seemed like there was not much talk about it anywhere else that I could find. But now we see it pretty much everywhere. While it sounded very strange at first, perhaps it will turn out like things we saw on the original Star Trek TV series a long time ago and assumed were just figments of some writer's imagination and would never really show up in the real world. Director Lagarde mentions the year 2040 in her speech.

Image result for star trek hand walkie talkie

I am pretty sure that the one paragraph in this speech that will get a lot of attention is this one:
"I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR."  (bold emphasis and underline is mine)
And we have talked about this very thing here for a long time. We have even pointed out that in order for the SDR to be used in this way in the future, the IMF will have to approve changes in the status quo (Director Lagarde says "be open to change").
While many will leap on this to assume that a new blockchain based SDR is waiting in the wings ready to be launched very soon, I do not believe this to be the case. As we have said here many times, something like this is possible in the future. We have a full page of articles archived here over the past several years that talk about this kind of thing. 
But the best information I have suggests that this process is likely to unfold gradually over a long time frame (unless a new major global crisis forces events to move more quickly). Note that in this speech Ms. Lagarde talks about the year 2040. That timing might be a bit long, but probably closer to reality than the idea that in the next year we will see a new blockchain based digital SDR launched. Absent a crisis, this is the way I can see this unfolding over time:
2018 - we see the first central bank digital currency launched (perhaps in Singapore)
Following this, we might see some other smaller central banks follow suit and issue central bank digital currencies in what we might view as trial runs to see how well the technology functions in the real world and how the public accepts it.
Next three to ten years - more and more individual central banks adopt central bank digital currencies (depending upon how well the trial runs turn out). Some of the major central banks come on board during his phase.
After all this (if it actually happens), we might then see the IMF think about trying to implement some kind of digital version of the SDR if central banks around the world have been successful in their efforts with central bank digital currencies. 
I think the IMF is more likely in the short run to look for ways to get broader use of the SDR and to promote the use of the so called "private SDR" as first step. The private SDR is not widely used at this time around the world and the official SDR can only be used within the IMF structure.
The IMF has a lot of questions to continue to study in regards to the SDR and of course any significant change to the way the official SDR is issued needs approval by IMF member vote. The US continues to hold veto power over any such votes taken at the IMF.
This time table could speed up of course. It might move faster on its own or another major crisis could force some kind of global monetary conference where major changes might be agreed to in response to the crisis. But, absent such a crisis, I think it is more realistic to look at these kinds of changes as taking place over many years starting with a few central banks testing out central bank digital currencies first.