A
few days ago, President Nicolas Maduro of Venezuela announced that his
government had launched a new state-sponsored cryptocurrency called the
petro. He claimed that $735mn worth of the new currency had already been
sold, though observers are sceptical, unless state entities have been
obliged to buy them. Even they will find it hard to do so, however, as
the technology platform on which the petro will be traded has not yet
been confirmed.
International demand for the petro will not be helped
by recent pronouncements from Warren Buffett and Charlie Munger, the
“sages of Omaha” who still control Berkshire Hathaway. Speaking of
cryptocurrencies in general, Buffett was scathing. “I can say almost
with certainty that they will come to a bad end,” he declared in
January, while noting for good measure that he would be glad to buy put
options on every one of them. Munger is, if anything, even more hostile,
characterising Bitcoin in particular as “totally asinine” and a
“noxious poison.” Not much room for doubt there.
They are, of course,
looking at Bitcoin as potential investments. The public authorities
have slightly different concerns. Market regulators are interested in
protecting investors, and have begun to issue warnings. Although these
warnings have been sotto voce so far, I expect regulators will raise the
volume soon, as the price gyrations continue. They should also be
worried about the opportunities created for money launderers, and for
trade in illicit drugs.
But central banks have a broader set of
concerns. Will cryptocurrencies usurp their role as monopoly suppliers
of money? Are there serious implications for financial stability if
central banks lose control of the levers which influence purchasing
power in the economy?
Interestingly, a number of different answers to
these questions are emerging, and central banks are dividing into hawks
and doves.
At the hawkish end of the spectrum sit the Chinese. Last
year, the People’s Bank of China shut Bitcoin exchanges and clamped down
on Initial Coin Offerings. Using a turn of phrase too vivid for Western
central bankers, Pan Gongsheng, a PBoC Deputy Governor, said in
December, “As Keynes has taught us, ‘the market can remain irrational
longer than you can remain solvent.’ There is only one thing left to do:
sit on the river bank and see Bitcoin’s body pass by one day.”
Russia,
unsurprisingly, takes a similar view. Elvira Nabiullina, the governor
of Russia’s central bank, declared in December that “we don’t legalise
pyramid schemes,” and “we are totally opposed to private money, no
matter if it is in physical or virtual form.”
The doves are
numerous, however. The Bank of Canada has noted that the
distributed-ledger technology underpinning Bitcoin could make the
financial system more efficient, and it is examining whether it should
at some appropriate point issue its own digital currency for retail
transactions. The Bank of England is similarly intrigued by the
possibilities, dismissing concerns that digital currencies currently
pose a risk to financial stability, and noting that the underlying
technology “may have many other uses across the financial system, and
may be a useful platform to power a central bank digital currency.” Both
banks are actively researching the subject, and their views might best
be described as Maoist, in the “let a hundred flowers bloom” sense.
So
it was brave of Agustin Carstens, the new general manager of the Bank
for International Settlements, the central banks’ central bank, to
choose the topic of Bitcoin for one of his first major speeches. Could
Carstens, the former long-time governor of the Bank of Mexico, find a
happy medium between the hawks and the doves, between the controlling
Chinese and the complaisant Canadians?
To frame his argument,
Carstens returned to first principles, seeking to define money and then
to understand the extent to which digital currencies qualify. The three
criteria, he reminds us, are that a currency acts as a unit of account, a
common means of payment, and a store of value.
Few, if any, goods
are priced in Bitcoin, it is very rarely used in transactions, and the
costs of doing so are prohibitive. As for being a store of value,
cryptocurrencies’ price volatility makes them, so far, a highly risky
investment. “While cryptocurrencies may pretend to be currencies,”
Carstens concludes, “they fail the basic textbook definitions.”
Moreover, without “institutional backup, which is best provided by a
central bank,” new crypto assets endanger trust in the fundamental value
and nature of money. So Carstens has positioned himself firmly in the
hawk colony.
Carstens throws in an environmental objection, too, for
good measure: the electricity used in the process of mining Bitcoin is
equivalent to the daily consumption of Singapore. Unlike Singaporeans,
who have the right to be air-conditioned in their humid climate, that
level of energy consumption for Bitcoin mining is both “socially
wasteful and environmentally bad.”
Is Carstens right to be so
hostile, or will he, in a few years’ time, be seen as a kind of monetary
King Canute, sitting in Basel on a well-upholstered central banker’s
throne, ordering the digital tide to retreat? It is too early to say. I
suspect the petro will fail, but I doubt if we have heard the last of
digital currencies, or distributed ledgers, despite the fatwas issued by
the likes of China, Russia, and the sages of Omaha. – Project Syndicate
* Howard Davies is Chairman of the Royal Bank of Scotland.
President Nicolas Maduro of Venezuela has announced that his government had launched a new state-sponsored cryptocurrency called the petro.