Mark Carney’s speech last week for the inaugural Scottish Economic Conference entitled “The Future of Money” marks a major milestone towards the adoption of cryptocurrencies (though not a clear recognition of crypto-assets – despite the jumbled terminology adopted).
He also stakes his claim of his, and other, central banks to remain incumbents by re-inserting themselves into the cryptocurrency model. As China, Turkey and an increasing number or others seem to want to.
But what he does not consider, or address – including a world of currencies competing to do a better job (generally or within a specific niche) – providing real competition for incumbents – is even more significant than what he does say.
Isolate, Regulate or Integrate
His conclusion of the need to ‘isolate, regulate or integrate’ cryptocurrencies and his preferred ‘better path’ – on the one hand selective targeting of isolation/regulation or integration and ‘leave it to us, the incumbents’, on the other – signals the adoption, or at the very least an intention to subsume, cryptocurrencies into the mainstream. (Although he rather worryingly labels them crypto-assets. Worrying because of the inevitable confusion the terminology engenders, and the equal confusion it may indicate in the mind of the speaker).
So, although he leaves his audience with little doubt that there is a glowing future ahead for the “underlying technologies” (Blockchain) which “are exciting” and he says that “authorities should be careful not to stifle innovations” Carney’s vision for this future however is very different from that of Bitcoin’s Satoshi Nakamoto – it could hardly be more different. Carney says:
Adam Smith worried about the potential debasement of public money and for good reason. Throughout history, governments would often betray the trust of their citizens be it Henry VIII reducing the precious metal content of his coins during the Tudor era, Pitt the Younger depleting the gold vaults of the Old Lady during the Regency period, or a pliant Reichsbank financing the government in Weimar Germany.
With the wisdom borne from such sad experience, most countries have now settled on centralised, public fiat money backed by robust institutions in order to provide the public with money that is both highly trusted and easy to use.
Although clearly written with pretensions to be taken seriously from an academic standpoint, reading the whole thing as a piece, rather than via pull-quotes for the consumption of journalists in the generation of headlines – which it did very effectively – it rather reads as a polemic in praise of the current financial system and a plea to allow her to subsume blockchain (rechristened DLT, Distributed Ledger Technology) and whatever other technologies she chooses – at her own will, and pace.
The old lady of Threadneedle Street should be left to her knitting undisturbed – there’s no need to be ‘down with the kids’, They should go play elsewhere.
But the biggest, nay fatal, flaw in the piece was not so much that it was ‘all over the place’ but that it produced only a straw man argument. Whether knowingly or otherwise Carney’s arguments we’re clearly directed at Bitcoin, as we’ve known it, and barely mention the myriad other innovations and developments in cryptocurrencies (which aim to fix the problems he identified).
Let alone the various species of tokens which have been clearly identified in the last few weeks by the Swiss regulator, among others. Including ‘utility’ tokens (backed solely by valuable real world services) and ‘asset-based’ tokens (backed by non-digital assets).
Perhaps because his arguments are intended to sink the possibility, in the popular mind, of the adoption of non-fiat cryptocurrencies as money?
He explicitly leaves the door open, by the way, for fiat-cryptocurrencies. That is those issued by a Central Bank such as the Bank of England. Indeed he identifies an ongoing research program with that end in mind. Leave it to us. Where are the experts. We’ve been doing it for centuries…
To this end he takes us on a lightning tour of that very history. Through the foundation of the Bank of England, the reigns of William III, Henry VII and Pitt the Younger and on to disaster in Weimar Germany.
What he does not do is recognise the many and crucial developments beyond the inception of Bitcoin over the last 10 years. Including and especially asset-backed crypto-assets – while threatening to subvert the terminology, not to mention variants that promise to rival and excel, in speed as well as security, over the current payment systems he cites
As Jonny Fry of TeamBlockchain has rightly pointed out, in answer to the assertion that the “annual electricity consumption for Bitcoin is double what Scotland uses”, “the first iteration of any technology is not the best… [and later iterations, including from EOS, mean] Proof of Stake using much less electricity to power it’s Blockchain”. (‘Proof of Stake’ is mentioned only in a footnote to Carney’s speech and its intent and promised ignored).
And likewise in to Carney’s misleading comparison that “Visa can process 65k transactions per second, Bitcoin only 7 per second” Fry point out that “Hashgraph can process over 300,000 Transactions Per Second.Telegram is looking to do 1m Transactions Per Second!” – while citing various other inaccuracies and misleading statements – which seem to be deliberate.
While Crypto-assets do not seek to be money, nor to replace it entirely, they do seek to augment it – and they exhibit only the volatility of the underlying asset. A huge area of development which Carney neglects to even mention.
No, asset-based-cryptocurrencies do not meet Carney’s tests – they cannot provide a unit of account – but they’re not intended to. But they do provide functionality, and liquidity, for a wide range of assets that traditional financial instruments and systems have yet to tackle, let alone equal, and so have huge promise. They were not addressed – except by stealing their clothes (terminology) to dress a Guy Fawkes doll ready for the Burning of cryptocurrencies as represented by Bitcoin.
Neither for that matter are utility tokens addressed, the most important area of development rivalling asset backed tokens. None of this was acknowledged.
Perhaps, like Jay Clayton at the SEC, he’s never seen a token he couldn’t classify as a security… because, like Clayton, perhaps he’d rather not look.
But by far the biggest flaw in the whole speech, which flows from the argument that underpins it, is that while (in imitation of Jamie Dimon) Carney cannot resist taking a crack at ‘greater fool’ crypto users he also dismissed ‘new paradigm justifications’ – as if the internet, the web and now blockchain technologies had not provided them!
Indeed although an urbane, seeming thoughtful and polished approach (as one might expect from the urbane, thoughtful and polished Mark Carney) the notes of astringency, anger and scorn, are not hard to find studying the full speech (available here). The old lady hiding her affront at the upstarts behind dismissive disdain…. Well really? We’ve been at this for centuries daaaahlings!
Because Carney assumes the future must, necessarily, reflect the recent past. But it is only, as he himself notes, since 1844 – a brief interval in the history of money, if not of the Bank of England, that there has been a sole franchise.
“It was not until the 1844 Bank Charter Act that the Bank of England’s note issuance responsibilities were formalised and the rights of others to issue notes in England and Wales began to be phased out. Today the Bank is the sole issuer of banknotes in England and Wales”
Throughout most of history there have been multiple, competing, forms of exchange. So what Carney has left out of his accounts is that we now live in a global world in which, like it or not, cryptocurrencies will continue to exist – and provide (seemingly unwonted) competition. Competition to being one of the main tenets of capitalism it must be noted!
Like it or not, and Carney is clear on the need to support innovations – especially those initiated or approved by the Bank it would appear – the future will be very different from the past.
The future will be very different from the past. It seems clear that however labelled – cryptocurrencies, crypto-assets or (the all embracing term) tokens, these tokens provide new and better ways of doing more and releasing more value and creativity than mere money alone.
As Mark Carney, perhaps above all others, should know… ‘past performance should never be relied upon as a guide to future’.