Crypto hawks and doves

Afew days ago, President Nicolas Maduro of Venezuela announced that hisgovernment had launched a new state-sponsored cryptocurrency called thepetro. He claimed that $735mn worth of the new currency had already beensold, though observers are sceptical, unless state entities have beenobliged to buy them. Even they will find it hard to do so, however, asthe technology platform on which the petro will be traded has not yetbeen confirmed.International demand for the petro will not be helpedby recent pronouncements from Warren Buffett and Charlie Munger, the“sages of Omaha” who still control Berkshire Hathaway. Speaking ofcryptocurrencies in general, Buffett was scathing. “I can say almostwith certainty that they will come to a bad end,” he declared inJanuary, while noting for good measure that he would be glad to buy putoptions 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 authoritieshave slightly different concerns. Market regulators are interested inprotecting investors, and have begun to issue warnings. Although thesewarnings have been sotto voce so far, I expect regulators will raise thevolume soon, as the price gyrations continue. They should also beworried about the opportunities created for money launderers, and fortrade in illicit drugs.But central banks have a broader set ofconcerns. Will cryptocurrencies usurp their role as monopoly suppliersof money? Are there serious implications for financial stability ifcentral banks lose control of the levers which influence purchasingpower in the economy?Interestingly, a number of different answers tothese questions are emerging, and central banks are dividing into hawksand doves.At the hawkish end of the spectrum sit the Chinese. Lastyear, the People’s Bank of China shut Bitcoin exchanges and clamped downon Initial Coin Offerings. Using a turn of phrase too vivid for Westerncentral bankers, Pan Gongsheng, a PBoC Deputy Governor, said inDecember, “As Keynes has taught us, ‘the market can remain irrationallonger 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 governorof Russia’s central bank, declared in December that “we don’t legalisepyramid schemes,” and “we are totally opposed to private money, nomatter if it is in physical or virtual form.” The doves arenumerous, however. The Bank of Canada has noted that thedistributed-ledger technology underpinning Bitcoin could make thefinancial system more efficient, and it is examining whether it shouldat some appropriate point issue its own digital currency for retailtransactions. The Bank of England is similarly intrigued by thepossibilities, dismissing concerns that digital currencies currentlypose a risk to financial stability, and noting that the underlyingtechnology “may have many other uses across the financial system, andmay be a useful platform to power a central bank digital currency.” Bothbanks are actively researching the subject, and their views might bestbe described as Maoist, in the “let a hundred flowers bloom” sense.Soit was brave of Agustin Carstens, the new general manager of the Bankfor International Settlements, the central banks’ central bank, tochoose the topic of Bitcoin for one of his first major speeches. CouldCarstens, the former long-time governor of the Bank of Mexico, find ahappy medium between the hawks and the doves, between the controllingChinese and the complaisant Canadians?To frame his argument,Carstens returned to first principles, seeking to define money and thento understand the extent to which digital currencies qualify. The threecriteria, he reminds us, are that a currency acts as a unit of account, acommon means of payment, and a store of value.Few, if any, goodsare priced in Bitcoin, it is very rarely used in transactions, and thecosts of doing so are prohibitive. As for being a store of value,cryptocurrencies’ price volatility makes them, so far, a highly riskyinvestment. “While cryptocurrencies may pretend to be currencies,”Carstens concludes, “they fail the basic textbook definitions.”Moreover, without “institutional backup, which is best provided by acentral bank,” new crypto assets endanger trust in the fundamental valueand nature of money. So Carstens has positioned himself firmly in thehawk colony.Carstens throws in an environmental objection, too, forgood measure: the electricity used in the process of mining Bitcoin isequivalent to the daily consumption of Singapore. Unlike Singaporeans,who have the right to be air-conditioned in their humid climate, thatlevel of energy consumption for Bitcoin mining is both “sociallywasteful and environmentally bad.”Is Carstens right to be sohostile, or will he, in a few years’ time, be seen as a kind of monetaryKing Canute, sitting in Basel on a well-upholstered central banker’sthrone, ordering the digital tide to retreat? It is too early to say. Isuspect the petro will fail, but I doubt if we have heard the last ofdigital currencies, or distributed ledgers, despite the fatwas issued bythe likes of China, Russia, and the sages of Omaha. – Project Syndicate* Howard Davies is Chairman of the Royal Bank of Scotland.