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After months of rumours, Facebook finally unveiled its digital currency plans – and they did not disappoint. The social media giant’s plans are far-reaching and have already attracted some well-known partners to back it. Is Libra really the best of the libertarian cryptocurrency and traditional corporate worlds combined?

When the social media giant with close to 2.4 billion people using the platform each month, launches a new digital currency, there is reason to pay attention.

Facebook’s Libra, clearly has the potential to quickly achieve vast scale, setting it apart from any other cryptocurrency and virtual or gaming currency around.

Facebook is well aware that in order for Libra to be successful, it needs to open it up, which is why it is seeking the support of other corporate backers and has announced that Libra will launch as an independent entity in 2020. Facebook apologises that the current state of technology doesn’t allow a digital currency to be simultaneously scalable (process hundreds/thousands of transactions per second) and be fully decentralised – without consuming half of the world’s electricity. Indeed, technology hasn’t yet made all this possible, but the status quo makes it very convenient for Facebook to launch Libra in a comfortable centralised way, whilst grabbing the world’s attention with the launch of a cryptocurrency on blockchain.

This article first appeared on ING THINK

Is Facebook’s GlobalCoin worth the hype? Launching platform currencies is nothing new in itself. Yet the sheer scale that a Facebook coin could achieve should give businesses, competition authorities and (central) banks some food for thought.

What is GlobalCoin?

When Bitcoin was launched in 2009, it was heralded as the digital currency that would make banks and other traditional intermediaries obsolete. But lately, it’s been established behemoths that have been announcing their own coins. Earlier this year, JPMorgan announced its “JPM Coin” for wholesale purposes, and today brought more news on Facebook’s project to launch its own “GlobalCoin”. What to make of this?

It is important to clear up two misunderstandings.

• Firstly, coining a nice name for a platform currency sounds like clever marketing, which is well understood in some corporate boardrooms. Establish vague associations with cryptocurrency, and headlines are guaranteed. But, strictly speaking, cryptocurrencies are decentralised. This means that the money supply and the infrastructure are managed by the collective userbase, which in practice is represented by interest groups such as miners, developers and exchanges. On the other hand, with Facebook’s coin, there is one centralised party which issues and manages the coin on its own platform. Facebook could also manage the exchange rate of its coin to traditional fiat currencies, such as the euro and the dollar. So referring to GlobalCoin as a cryptocurrency is wrong, or at best irrelevant. How Facebook implements the coin at a technical level, on a blockchain or otherwise, is not relevant from an economic or monetary perspective.
• Secondly, GlobalCoin as a currency issued on a platform, is nothing new. Many games have had their own virtual currencies for a long time. Prepaid telephone cards are another example. We know such currencies from the non-digital world as well. At a concert, you often need to buy custom coins to pay for beer. So nothing really new here. And because virtual currencies are not a new phenomenon, they are subject to well-established existing regulations. Indeed, Facebook acquired an “electronic money institution” license in Ireland in late 2016 and is allowed to issue and manage virtual currencies throughout the EU using that license.

“Nothing to see here people, please move on”?

Not quite. Even though Facebook’s currency project is nothing new in itself, the scale that a coin on Facebook’s platform could achieve is something to reckon with. It is clear where Facebook is getting its inspiration from. The Chinese WeChat app has been dubbed an “app for everything”. It includes a pay functionality, which means users can basically do everything on the platform and in the app. For Facebook, adding its own currency would provide a powerful incentive for its users to stay on the platform and to transact with suppliers there, paying them in Facebook’s virtual currency. This, in turn, would incentivise business suppliers to be present on Facebook’s platform and accept its coins, to avoid losing a significant chunk of their customers.

So while banks may find themselves disintermediated, business suppliers may in contrast be bound to Facebook’s platform. Competition authorities around the world are therefore probably watching Facebook’s moves closely. Central banks are probably watching, too. Launching virtual currencies on a modest scale has a negligible impact on monetary policy and financial stability. But if a lot of transactions end up being handled by what is, in effect, a foreign currency (insofar as its exchange rate is managed vis-à-vis a basket of currencies), central banks might want to think again.

This article first appeared on ING THINK.

Dit artikel is verschenen in ESB (104)4769, pp12-13, januari 2019.

Er zijn voorstellen voor monetaire hervormingen in alle kleuren en smaken.  Een taxonomie hiervan schept inzicht in zulke curieuze begrippen als Vollgeld, Positive Money, full-reserve banking en narrow banking.

De afgelopen jaren zijn er diverse ideeën, alternatieven en hervormingsvoorstellen voor het traditionele financiële stelsel ontwikkeld.
Veelal is de leidraad dat het bij geld en betalen om maatschappelijk essentiële nutsfuncties gaat, die voor alle burgers altijd beschikbaar moeten zijn. Uitgangspunt is vaak ook een zekere onvrede met de wijze waarop geld, betalen, maar natuurlijk ook sparen en lenen, in het huidige financiële stelsel zijn vormgegeven.

De ontstane ideeën laten zich ordenen naar de mate van centralisatie die men voorstaat, zie figuur 1. Aan de ene kant van het spectrum vinden we cryptovaluta, aangevoerd door Bitcoin, aan de andere kant ideeën zoals volgeld die terug te voeren zijn op het Chicago-plan uit de jaren dertig.
Het huidige stelsel zit daar tussenin.

Een wereld zonder instituties

In het ideaalbeeld van cryptofans zijn er geen centrale instituties. Tien jaar na de lancering van de Bitcoin zijn nadrukkelijk, naast de mogelijkheden, ook de beperkingen van een dergelijke wereld gebleken. De afwezigheid van centrale instituties blijkt besluitvorming stroperig te maken. Er worden
bittere stammenoorlogen uitgevochten, met een versplintering van het veld tot gevolg.

Ondanks het ideaalbeeld blijken ook in de decentrale cryptowereld markten een neiging te hebben instituties te organiseren, zoals mining-collectieven, centrale platforms (beurzen) en portemonneediensten. Zonder regulering en toezicht hebben sommige hiervan de potentie de markt te domineren.

Ook hebben cryptobeleggers op een pijnlijke manier geleerd dat het tegenpartijrisico volledig bij hen ligt. Bij talloze hacks zijn klanten veel geld kwijtgeraakt: de door www.cryptoaware.org bijgehouden teller van de hackschade staat inmiddels boven de 2,5 miljard dollar. Achter veel initial coin offerings (ICO’s) bleken zwendelaars te zitten die er met het geld vandoor gingen. Beleggers genieten in deze gevallen nauwelijks tot geen gereguleerde bescherming, en hebben dus geen middelen om hun recht te halen.

Bij kredietverlening in de cryptowereld zouden ook het kredietrisico en het renterisico, die in de traditionele wereld door de bank gedragen worden, volledig bij de klant liggen. Libertijnen zien dit als een voordeel: laat mensen maar hun huiswerk doen en op de blaren zitten als het misgaat. De praktijk leert echter dat veel mensen hun prioriteiten elders leggen, en dat juist de cryptomunten tot speculatieve bubbels leiden. Het volledig decentraal beoordelen en spreiden van risico’s blijkt nog niet zo simpel te zijn.

Centrale geldschepping, decentrale kredietverlening

In veel volgeld-voorstellen wordt er geredeneerd dat als de geldschepping wordt ‘genationaliseerd’, de kredietverlening juist sterk kan worden geliberaliseerd, en daarmee in principe gedecentraliseerd. Het ‘nationaliseren’ van geldschepping betekent dat bancaire kredietverlening niet meer met geldschepping gefinancierd kan worden. Dit roept de vraag
op: hoe dan wel? Het antwoord kan variëren van peer-to-peer crowdfunding tot kredietverstrekking van overheidswege. De leidraad zou wat mij betreft telkens moeten zijn: op welke schouders komen de risico’s te liggen die nu eenmaal bij bankieren horen?

Decentrale kredietverlening plaatst een grote verantwoordelijkheid bij het individu als geldverstrekker, en zou idealiter de concurrentie en daarmee de markefficiëntie moeten bevorderen. Maar het individu kan de risico’s maar
beperkt overzien, zeker financiële risico’s die zich over een langere termijn uitstrekken. Individuen kunnen zich er bovendien nauwelijks tegen indekken. Groepsvorming geeft de mogelijkheid tot het gezamenlijk dragen van risico’s. Zo kunnen er collectief risico’s genomen worden zonder dat
individuen alles in de waagschaal hoeven te stellen.

Er zijn daarentegen ook volgeld-voorstellen die overgaan tot volledige centralisatie, waarbij kredietverleners door de centrale bank gefinancierd worden. Het nemen van risico’s is essentieel om als samenleving vooruit te komen. Risico’s spreiden en delen is de essentie van bankieren en verzekeren, en van het collectieve element in ons pensioenstelsel. Maar moet dit principe zo ver doorgevoerd worden dat alle risico’s volledig bij het collectief liggen? Dat zou een efficiënte bestemming kunnen belemmeren van schaarse financiële middelen in de economie – de nadelen en valkuilen
van centraal geleide economieën worden ons tot op de dag van vandaag gedemonstreerd.

Tot besluit

De uitersten op het spectrum van centralisatie zijn niet erg werkbaar of aantrekkelijk. Het huidige financiële stelsel zit op dit spectrum ergens in het midden. En dat is dus niet voor niets. Maar dat betekent natuurlijk niet dat het denken nu klaar is. Hoe het bankenlandschap er ook precies uit gaat zien, we weten dat er altijd behoefte zal blijven aan betalen, sparen en lenen. Goed bankieren in de toekomst zal antwoord moeten geven op de vraag hoeveel risico acceptabel is om groei te faciliteren, hoe we krediet goed toewijzen en hoe we de risico’s goed delen. En ook dan weer zullen de beste antwoorden bestaan uit een mix van private en publieke, van individuele en collectieve elementen.

Literatuur

Buitink, P. en R. van der Linde (2019) De econoom aan zet voor de bankrekening zonder ­kredietrisico. ESB, 104(4769), 21–23.

Dawnay, E. (2017) Sovereign money initiative – The background to the national referendum on sovereign money in Switzerland.

Dyson, B., G. Hodgson en F. van Lerven (2016) Sovereign money – An introduction.

Hayek, F.A. (1990) Denationalisation of money: the argument refined. Hobart Paper (special) 70. Londen: The Institute of Economic Affairs.

Kay, J. (2009) Narrow banking: the reform of banking regulation.

Nakamoto, S. (2008) Bitcoin: a peer-to-peer electronic cash system.

Deze week was ik te gast bij BNR’s @CryptocastNL. Met @Misssbitcoin en @hmblank bespraken we cryptocurrency, blockchain, en de rol die banken hier misschien kunnen spelen:

Deze week te gast in de 28ste aflevering van de Cryptocast: Teunis Brosens, econoom bij ING. Met Teunis bespreken we de rol die weggelegd is voor banken om hun klanten te voorzien in behoefte én het hoofd boven water te kunnen houden. Ook geeft hij een kijkje in de toepassingen die banken gebruiken om aan de achterkant verbeteringen toe te kunnen passen. Daarnaast spreken we over of bitcoin geld is en hoe cryptocurrencies er in haar meest optimale vorm uit zouden zien.

Kijk op de BNR-site of luister hier.

This week, Financial Times commentator Martin Wolf argued that the Swiss should vote in favour of Vollgeld- a plan to fundamentally change the way money is created. We believe this is a risky experiment.

Open to ideas

We have discussed some pros and cons of Vollgeld elsewhere and Wolf raises some very valid questions. In discussing some of them, we should first emphasise that we are not against alternative setups of the monetary system per se. There are many developments, tech-related and otherwise, which prompt financials and banks, in particular, to fundamentally rethink their business models and balance sheets. Why not add monetary reform to the mix? In fact, when designing the system from scratch with today’s technology and knowledge, one would probably exclude physical cash (way too easy to counterfeit and abuse) and include a form of central bank digital cash. After all, the idea that the public should have access to money at its source, and not only via an intermediary like a bank, is fundamentally appealing.

But money creation is not the source of the problem

Yet Vollgeld goes a few steps beyond introducing central bank digital cash. It strips banks of their money creation ability. This is often justified by pointing to repeated banking crises. Yet most, if not all of those crises, started with credit. That means they affected the asset side of banks’ balance sheets. Crises tend to be called ‘credit crises’ and not ‘money (creation) crises’ for a reason. Money, on the other hand, is a bank liability and is at best a by-product, not the source, of the problem. It should also be noted that credit necessarily involves two parties: a lender and a borrower. Credit cycles are not only supply-driven but also reflect mood swings among borrowers.

Shadow banking would get a boost under Vollgeld

Wolf is well aware of all of this, of course, but notes that in a crisis (whatever its source), a bank will be rescued to protect its liabilities, in particular, deposit holders. By disconnecting deposits from bank assets, banks no longer need to be rescued. This sounds like a logical solution. However, depositor protection is just one reason for the elaborate system of bank oversight that has been erected. Credit crises show that a sudden stop in credit supply is detrimental to an economy. As depositors, we may be glad our money is safe, but if we then lose our jobs because of a deep recession, we are hardly better off.
Moreover, the most recent and severe crisis began with lending by non-bank entities in the US. ‘Parallel banking’ or ‘shadow banking’ is a channel starting with originate-to-distribute lenders and ending with money market funds. This channel performs functions that are normally done by banks: transforming non-liquid, long-duration and risky assets into highly liquid, short-term and (perceived) low-risk liabilities. We all know where US shadow banking ended in 2008. The point here is, Vollgeld, or any other monetary reform aimed at money and money creation, does not address the issue of the parallel banking channel mimicking banks. In fact, this parallel banking channel receives a boost under Vollgeld as traditional bank lending is curtailed and made less competitive by the inability to create money.

Strict regulation still needed

Wolf rightly states that investors will bear the risk. But is that sustainable? In a Vollgeld system, lenders will compete for funds by offering attractive terms. Yield swings may contribute to booms and busts, just as they do in bank-based lending. In addition, parallel banks will try to shape their liabilities into something that resembles money and traditional deposits as closely as possible, in terms of liquidity and perceived risk – as US money market funds started to do back in the 1970s. Investors will be lulled into believing these “near monies” are like money, also in terms of safety. A belief that will hold until the next crisis – when investors will call for bailouts (which were duly established e.g. in 2008).

So in order to avoid the proliferation of such ‘near monies’ and the inflation of the next credit bubble outside the regulated banking system, lenders, both bank and non-bank, will need to be tightly regulated from the start, which annuls one of the touted advantages of Vollgeld-like systems, namely less regulation.

But if we need to maintain strict regulation anyway, regardless of where money is held, why make the switch to an untested alternative setup with uncertain benefits? A system too, where the central bank has the difficult task to make crucial judgements about the pace of growth in both money and credit?

Lack of detail

As Wolf acknowledges, regulation and supervision have changed a lot over the past ten years, giving supervisors a host of new tools to prevent crises and if needed, wind down banks while imposing losses on holders of equity and debt. At the same time, Vollgeld and sister proposals at this time are lacking in detail. Do the Swiss really want to subject their large financial sector to such an unprecedented experiment? Better to first work it out in more detail, and start experiments on a more limited scale.

This post first appeared on THINK.ING.com

The Swiss vote on monetary reform on 10 June. A “Yes” to Vollgeld is a low-probability, but a high-impact event. Ring any Brexit bells? 

Vollgeld: a Brexit-sized referendum in the Alps

On 10 June, the Swiss vote on “Vollgeld”. This referendum asks whether the Swiss want to reform their monetary system in a fundamental and unprecedented way. The referendum has largely remained under the radar outside of Switzerland. That may, however, be a mistake. Recent polls indicate a rejection is not a done deal. A “Yes” would first herald a period of great uncertainty, in which the Swiss Franc could suffer. In the longer term, more expensive and scarce credit hurt the economy, but the franc may benefit from deflationary policies.

A rejection is not a done deal

Moreover, the Brexit referendum of 2016 should have taught the forecast community some modesty. And the louder “the experts” recommend to stay away from something, the more inclined people appear to gravitate towards it. After all, to paraphrase a British minister during the Brexit campaign, “people have had enough of experts”. In Switzerland too, the “elite”, including the government, the Swiss central bank (SNB), the banks and a number of scholars, have come out against Vollgeld. If only for that reason, a “Yes” vote should not be excluded – although to be clear, a rejection remains our base case.

What is this Vollgeld and why should I care?

Which brings us to the impact. Here too, an important parallel with Brexit is that a “Yes” would herald a period of uncertainty. In short, Vollgeld would convert commercial bank deposits into SNB liabilities, temporarily replacing the gap on commercial bank balance sheets with SNB loans. Commercial banks would then no longer be allowed to create money when lending.

This basically reverses the order for banks. Currently, they can lend and worry about funding the loan later. Under Vollgeld, they first have to collect the funds, and can then go on and lend these afterwards. That sounds like a simple tweak, but it has big consequences. Vollgeld and various alternatives have been debated among economists for many years. But it has never really been tried – let alone in a developed economy with a big banking sector which finances 33% of its balance sheet with deposits.

A fundamental reform with wide-ranging consequences

Vollgeld is a complicated monetary reform about which books can be (and have been) written. We shortlist some consequences here. We discuss them at greater length in our main report.

• Current accounts are banks’ most stable and cheap sources of funding. As these are lost (they are converted into SNB liabilities), bank lending will become more expensive and supply may be reduced. Bank profitability will suffer.
• Current accounts will become more expensive for depositors, as the costs of e.g. cybersecurity and maintaining the payment system will have to be paid for directly.
• The central bank will, whether it wants to or not, get a more politicised role. Vollgeld is created and doled out to the government or citizens “for free”, so it is basically helicopter money. The SNB has to decide on the amount of helicopter money to be created. Also, it will have to “ensure the supply of credit to the economy”, providing additional funding to banks if necessary.
• Contrary to what proponents argue, Vollgeld will not materially reduce the incidence of crises. After all, financial crises tend to stem from an overextension of credit, not an oversupply of money. In a Vollgeld system, lenders will try and find ways to circumvent the limitations Vollgeld imposes on funding. In addition, reliance on non-bank lending may increase. Non-bank lending was where the 2008 financial crises started in the United States.

“The [Vollgeld] initiative raises unrealistic expectations… [it] is an unnecessary and dangerous experiment”
Thomas Jordan, SNB President. The SNB on Vollgeld (in German)

So what happens after a “Yes”?

Should the Swiss adopt Vollgeld, then (like with Brexit) initially uncertainty will dominate. This would be a negative for the Swiss Franc. In the longer term, Swiss banks and the economy

If adopted, uncertainty will dominate

will suffer from reduced credit. The SNB will find it much more difficult to reverse helicopter money creation than to reverse more traditional monetary policy (raising rates, or selling assets to reverse quantitative easing). Therefore, the central bank will want to avoid creating too much money in the first place and adopt a conservative, deflationary monetary policy. This may be a positive for the franc. The positive effect may be reinforced by the safe haven status provided by Francs held directly at the SNB.

Is a fudge still possible after a “Yes”?

The Vollgeld initiative spells out the changes it wants to see implemented in the law. Yet the follow-up to the Swiss “mass immigration” referendum (which the EU judged to be a violation of free movement principles) shows that the Swiss Parliament — which has come out against Vollgeld — may try and water it down. This comes with political risks, though. If Vollgeld is adopted with a great majority, its proponents are likely to call for another referendum if they feel Parliament is not implementing Vollgeld properly. A thin majority, on the other hand, increases political leeway for Parliament to come up with a fudge.

Read our full report “The Swiss Vollgeld referendum: an unprecedented experiment”.
This article originally appeared on THINK.

Vandaag zat ik in de Tweede Kamer om mijn visie op cryptovaluta te geven. Hier het paper dat ik vooraf aan de Kamerleden heb toegezonden. In het paper betoog ik dat cryptovaluta in theorie decentraal van opzet zijn, maar dat in de praktijk zaken er een stuk traditioneler, namelijk meer gecentraliseerd, aan toe gaan.

• Dat begint met het handelen in cryptovaluta. De meeste mensen die trots melden in cryptovaluta te investeren, doen dat helemaal niet. Ze beleggen in feite in cryptovaluta-derivaten. Grofweg 70% van de handel vindt namelijk plaats via crypto-beurzen. Deze beurzen hebben zelf wel een wallet op de blockchain(s). Maar de handelaren op de beurs hebben zelf geen cryptovaluta op de blockchain. Ze hebben slechts een claim op de beurs, toevallig uitgedrukt in cryptovaluta. Klinkt dat als een bankrekening? Daar lijkt het wel een beetje op. Met dit verschil dat er geen enkele regulering is voor deze beurzen. Het gaat dan ook wel eens mis.
• Daarnaast is het beurslandschap sterk geconcentreerd: zo’n driekwart van de handel loopt via vier beurzen.
• Dan zijn er de miners. Miners clusteren samen in pools. In theorie kunnen miners met 51% van (de computerkracht in) het netwerk in handen, hun wil opleggen aan het netwerk. De grootste drie mining pools beheersten bij Bitcoin al enige tijd meer dan de helft van het netwerk.
• En tenslotte de programmeurs. Hoewel de broncode van de meeste cryptovaluta’s vrij beschikbaar is, en iedereen eraan kan bijdragen, is er in de praktijk een klein groepje programmeurs dat verreweg het meeste werk doet. In het geval van Bitcoin zijn er uiteindelijk drie mensen die iedere verandering in de code moeten autoriseren. Ook hier is de macht dus sterker gecentraliseerd dan je misschien voor een “decentraal” project zou verwachten.

Conclusie wat mij betreft: niet alles is wat het lijkt. Cryptovaluta en blockchain zijn prachtige innovaties (en banken zijn druk bezig met het toepassen van blockchain). Maar als de revolutionaire decentrale theorie van cryptovaluta in aanraking komt met de realiteit van luie gebruikers, snelle jongens en criminelen, blijkt het toch anders te lopen. En ontstaan machtsconcentraties die er heel traditioneel uit zien. Met als belangrijk verschil dat er geen enkele vorm van regulering of toezicht is. Caveat emptor!

Download het volledige paper hier.

Zie ook:

• Waarom bitcoin een niche-valuta zal worden
• Waarom bitcoin-transacties duurder zijn dan je denkt
• Zo beleg je in cryptovaluta (nu.nl)