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IMF Chief Economist Urges Regulatory Vigilance on Libra

IMF chief economist Gita Gopinath has called on global regulators to be vigilant and take the proper regulatory steps regarding Facebook’s Libra.

The International Monetary Fund (IMF) has called on global regulators to pay attention and take proper regulatory action regarding Facebook’s Libra.

Speaking with Reuters on July 17, Gita Gopinath, chief economist at the IMF, urged the global regulatory community to pay serious attention to Facebook’s crypto project during the early stages of its development. Gopinath emphasized that global financial regulators should act immediately to ensure that they are not too late in taking the necessary measures.

Gopinath outlined the major risks associated with the stablecoin, including concerns about data privacy, consumer protection, as well as “backdoor dollarization.” Still, the IMF economist admitted that Libra could help boost financial inclusion.

Gopinath’s remarks come amid a hearing on Libra at the United States House of Representatives Financial Services Committee. Lawmakers in both the House and the Senate criticized Facebook’s past behavior in regard to data privacy and consumer protection. 

Regulators Already Evaluating the Risks of Libra

Meanwhile, a number of global jurisdictions have expressed their concerns towards Libra and have begun investigating the forthcoming coin. Japanese authorities recently launched an investigation of the impact of Libra on monetary policy and financial stability.

Previously, India’s authorities claimed that the government would not be comfortable with a private cryptocurrency. On July 8, China’s central bank announced it started developing its own digital currency in response to Facebook’s Libra as it could pose a risk to the country’s financial system.

Other authorities are less skeptical. Bank of England governor Mark Carney recently claimed that people need to acknowledge the issues that Facebook is trying to solve with Libra, despite the potential downsides of the project.

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IMF: Stablecoins Could Surpass Traditional Form of Money

IMF rise of Stablecoins

Crypto analysts predict that global
trade will eventually run on the power of cryptocurrencies. This would severely
affect the trading model for banks. Most of these financial institutions have
preferred to bury their heads in the sand to the coming disruption. The
International Monetary Fund’s position on crypto is rather peculiar. The Fund
seems more at home than other banks with the change coming to the industry.

A new IMF paper has said that bank and cash deposits could be kicked to the curb by digital currencies. The document specifically mentions fiat pegged cryptos as the perfect replacements for traditional currencies. The July 15, Fintech paper titled “The Rise of Digital Money,” explores tech firms competition with the established banking and credit card companies.

On the paper’s introduction, the
authors write:

 “Digital forms of money are increasingly in the wallets of consumers as well as in the minds of policymakers. Cash and bank deposits are battling with so-called e-money, electronically stored monetary value denominated in, and pegged to, a currency like the euro or the dollar”.

The IMF’s Optimistic View on Stablecoins

The paper goes further to elucidate the risks as well as the benefits that will arise with the mass adoption of stablecoins. It further broaches the potential of digital currency monopolies. The IMF also warns that fiat is in for the race of its life. The fierce competition stemming from crypto could eventually surpass it.

Christine Lagarde, the Managing Director of the IMF, has been supportive of blockchain technology in the past. She has said that blockchain innovations will shake the world of traditional finance. In an April 10 CNBC interview, on “Money and Payments in the Digital Age,” she noted that some central banks were beginning to embrace blockchain’s potential.

She, however, reiterated that trust
and stability were vital in the use of blockchain in finance. The IMF
chairperson also said that these aspects would keep the industry stable. As
expected, she has called for regulation in the cryptocurrency space.

One digital currency that shares the banker’s view on regulation is Ripple (XRP). It does not come as a surprise that the IMF chair has in the past affirmed both Ripple and Circle. Ripple has significant partnerships with some of the world’s largest banks and central banks as well.

The US Lawmakers Fight Facebook’s Stablecoin

Both financial institutions and
governments alike are beginning to face the reality of digital currencies. Some
world governments, nevertheless, have decided to put a foot down on their
proliferation. The US legislature has proposed to ban technology firms from
venturing into the space. 

The draft legislation titled “Keep Big Tech out Of Finance Act” says that tech firms with annual revenues beyond $25 billion will be restricted from creating their digital currencies. This debate has flared courtesy of the Libra, Facebook’s stablecoin. 

Libra’s 2020 launch now lies in the
balance as the House prepares to debate the draft law. The social media giant,
in partnership with its 28 partners, has formed the Libra association to govern
the token. The draft bill would hinder the function of the Libra Association
since in its essence it would be acting as Libra’s central bank, but without
the law to back it.

Unlike the IMF, that is acknowledging
a future with crypto, US President Donald Trump has shilled the dollar as the
future. He, in turn, said that digital currency’s value was “based on thin

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IMF: Network Effects Could Spark Blaze of Digital Money Adoption

The International Monetary Fund has argued that network effects could spark the blaze for the mass adoption of new digital monies.

The International Monetary Fund (IMF) has argued that network effects could spark the blaze for the mass adoption of new digital monies.

In a fresh report published on July 15, the IMF aims to create a conceptual framework for categorizing new digital monies such as Facebook’s Libra and stablecoins as well to think through the implications of their emergence for central bank policy.

In its analysis of e-monies — including but not limited to blockchain-based assets — the IMF identifies six factors that could drive their rapid growth for payments: convenience, ubiquity, complementarity, low transaction costs, trust and network effects. The report states:

“The first five reasons may be the spark that lights the fire of e-money; the sixth is the wind that could spread the blaze. The power of network effects to spread the adoption of new services should not be underestimated.”

To bolster its claims, the IMF points to the rapid switch from email to SMS and from SMS to social messaging platforms such as Whatsapp, noting that adoption of the latter was exponentially faster than the initial switch to email — noting that its 1.5 billion user base is attributable more to word of mouth than to formal marketing strategies.

The IMF also creates a taxonomy indicating its view of the thriving digital money sector, notably adopting the blockchain industry’s cornerstone principle of decentralization as one of its principle classificatory parameters:

 “Money trees.” A taxonomy of the digital money landscape

 “Money trees.” A taxonomy of the digital money landscape. Source: IMF 

Devoting a section of its analysis to the question of central bank digital currencies (CBDCs), the IMF proposes a hybrid approach that would be established by a public-private partnership — defining the proposed asset as a synthetic CBDC (sCBDC). 

A central bank would have limited responsibility as regards a prospective sCBDC, offering settlement services — including access to its reserves — to e-money providers, who would, in turn, be robustly regulated. This hybrid — and not full-fledged — sCBDC would stand to benefit from the comparative advantage of the private sector to innovate and interact with consumers while relying on the central bank to provide trust and efficiency, the report argues. The IMF concludes:

“Much lies in the hands of central bankers, regulators, and entrepreneurs […] but one thing is certain: Innovation and change are likely to transform the landscape of banking and money as we know it.”

This spring, the IMF managing director Christine Lagarde said that blockchain innovators are shaking the traditional financial world and having a clear impact on incumbent players, having previously acknowledged that the organization could potentially release its own digital asset in future.

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IMF Predicts Central Banks to Issue Digital Currencies

The IMF believes that some central banks are going to issue digital currencies, based on responses to a survey issued jointly with the World Bank.

The International Monetary Fund (IMF) believes that central banks may issue digital currencies in the future, according to a report by the IMF on June 27

According to the full paper, the IMF and World Bank conducted a survey on fintech that solicited answers from financial institutions within all member countries, and has based its conclusions in part upon the 96 received responses.

According to the paper, several central banks in different countries are considering implementing some form of Central Bank Digital Currency (CBDC). Uruguay has reportedly launched a CBDC pilot program already, while the Bahamas, China, Eastern Caribbean Currency Union, Sweden and Ukraine are “on the verge” of testing their systems.

Additionally, a number of central banks have reportedly been conducting research on CBDC’s potential impact on financial stability, the structure of the banking sector, entry of nonbank financial institutions, and monetary policy transmission. 

Motivation for offering a CBDC varies, per the report. Both emerging economies as well as developed economies are said to be considering CBDC options, with the latter seeking to provide an alternative to cash as its frequency of use dwindles. For emerging economies in developing countries, on the other hand, the main upshot of a CBDC would be reducing banking costs, as well as potentially making banks more available to unbanked citizens.

One similarity, however, is that most central banks are not interested in issuing an entirely anonymous CBDC, as the institutions want transactions to ultimately be traceable by authorities when necessary. However, some of these institutions are considering portioning off a subset of tokens reserved for large holdings and transactions, and only making those ones traceable.

As previously reported by Cointelegraph, the conservative economist Stephen Moore has recently joined a project to make a Federal Reserve-like entity for cryptocurrencies. The project, Decentral, is a purported attempt to regulate cryptocurrency supply in order to reduce volatility in the crypto market. 

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Ripple Is More than Remittance, May Facilitate Central Banks

Ripple Central Banking

Traditional financial institutions today are in a race for faster and up to date banking technology. Ripple is positioning itself as the solution to significant banking inefficiencies. Consequently, banks are investing in blockchains lest they are outdone. In January 2019, for instance, Ripple made an announcement that it had over 200 global banks as their partners.

Banks, due to technological advancements, have found themselves in
a sink or swim situation.  Their market
is flooded, yet filled with finicky, demanding customers. The fast and
affordable transactions speeds that Ripple brings will help them stand out from
the pack. Ripple has also partnered with the Gates Foundation‘s MojaLoop, to build a financial internet for the
financially marginalized.

The Ripple and IMF Alliance

Ripple, however, seems focused on tackling more than the SWIFT banking network. The startup’s co-founder Chris Larsen is going to be a part of the high-level discussions on Fintech and the future of finance with the International Monetary Fund.  The IMF had this panel before and discussed the vital need of the cross-border consensus. Other worthy mentions in the discussion were the role of AI, mobile computing, and distributed ledger technology on FinTech sector growth.

The former panel had nineteen of the worlds of finance and technology sectors most renowned names.  The 2019 panel will have Jeremy Allaire, the CEO of Circle, Marco Santori the president as well as Adam Ludwin of Chain.  Christine Lagarde, the IMF director earlier in the year underlined the critical need for banks to adapt.

She asked
banks to act upon innovative new technology to give the customers better
services. Furthermore, Lagarde warned banks, urging them to adapt while noting
that Ripple and Circle are critical for their (banks) survival.

“I think in the banking system at large in many, many countries; the difference will not be between those who are disrupted and those who survive. The difference will be between those who are cannibalized because they are not seeing it coming, and they are not embracing it, and those who self-induce that cannibalization. […] So that is where I see changes happening now. If you think of Circle, and Ripple and all those – that is where they are active and helpful.”

Central Banks Are Ripple’s End Game

The relationship between the IMF and Ripple is a pointer to Ripple’s long game. The IMF really does not need remittance solutions but has Chris Larsen sitting on its advisory panel. Brad Garlinghouse, the Ripple CEO, has also just been at a Swiss National Bank (SNB) Conference consultative board meeting. Agustín Carstens, the Bank for International Settlements (BIS) General Manager, attended the meeting too.

The BIS owned by central banks, “fosters international monetary and
financial cooperation, and serves as a bank for central banks.” Its services
are for international organizations and central banks and is headquartered in
Basel, Switzerland.

Notably, Brad was the only private sector representative in the meeting, and his talk on Ripple’s products made XRP enthusiasts beam with pride. Besides the BIS boss, Christine Lagarde, Norman Chan chairman of the Hong Kong Monetary Authority and the Central Bank of Russia governor Elvira Nabiúllina was in attendance. Other prominent attendees include the SAMA governor, Ahmed Abdulkarim, and IMF director Tobias Adrian.

XRP enthusiasts say that Christine Lagarde is selling Ripple’s solutions to the otherwise crypto bear, Agustín Carstens. It, nevertheless, seems to be working because Carstens was recently quoted calling blockchain, a powerful technology. Similarly, the European Central Bank in its paper on the implications of crypto assets on monetary policies and banking named XRP as a viable option to enhance liquidity and functionality in financial institutions.

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Bitcoin Hits All-Time High Versus Argentine Peso Amid Presidential Election Risks

The bitcoin price soared to as high as 394,000 Argentine pesos as major investors worry that a populist former president could return to a position of power.

The biggest cryptocurrency, bitcoin (BTC), has hit an all-time high versus the Argentine peso amid the ongoing decline of the currency, Financial Times (FT) reports on May 27.

According to the report, the bitcoin price has soared to as high as 394,000 pesos ($8,762.95 at press time) per coin, exceeding prices versus the Argentine peso not seen since the bubble in late 2017.

Bitcoin price against Argentine peso since 2017. Source: BitcoinAverage

Bitcoin price against Argentine peso since 2017. Source: BitcoinAverage

The new all-time high of bitcoin versus the peso takes place amid a crypto bull market this year, along with the ongoing depreciation of the Argentine peso against the U.S. dollar.

According to CNBC charts, the U.S. dollar has seen a massive growth over the peso during the past year. The new lows in the value of Argentina’s currency are reportedly caused by uncertainties in the upcoming presidential election.

U.S. dollar price against Argentine peso. Source: CNBC

U.S. dollar price against Argentine peso. Source: CNBC

Despite the recent attempt to support the Argentinian economy by the International Monetary Fund (IMF), with the country’s central bank having allowed to use IMF funds to intervene in the peso, some analysts are reportedly concerned that the program could fail if the populist opposition wins the presidential election in October, as FT reported.

While investors support the current President Mauricio Macri, the opposition — in which former leftist president Cristina Fernández de Kirchner is running as a deputy to presidential candidate Alberto Fernández — has reportedly introduced a “democracy discount” to the peso.

Major global asset manager Amundi reportedly said that asset prices have reacted “very negatively” over the past month to the growing chance of Kirchner returning to power.

As FT noted, the peso dropped to new lows against the dollar in April, following a loss of more than half of its value last year, when both the peso and Turkish lira dropped amid investor expectations of rising U.S. rates.

Earlier in March, venture capital billionaire Tim Draper advised the president of Argentina to legalize bitcoin in order to improve the economic situation in the country.

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How Security Tokens Can Prevent an Impending Financial Crisis

An in-depth view into security tokens.

Many economists argue that the root causes of the 2008 global financial crisis have yet to be addressed comprehensively, or that measures taken have been exhausted, such as the extent to which quantitative easing was used, which has been put forward by the deputy director of the International Monetary Fund (IMF).

Some argue that the efforts to address the causes of the crisis have actually made the system more — rather than less — susceptible to a catastrophic collapse. On the heels of the recent yield curve inversion, finding new solutions that address the causes of the 2008 crisis are more important than ever. The yield curve inversion, an 18-month leading indicator of looming liquidity challenges, has proceeded every major recession since the 1970s, including the global financial crisis of 2008.

The time to pursue new approaches to mitigate liquidity events is now. An investigation of the systemic weaknesses that led to the crisis points to the promise of a new financial instrument that has entered the market — tokenized securities. The liquidity benefits of these instruments derived from the strengths of blockchain and distributed ledger technology suggest that a new approach is possible to aid in preventing and addressing a repeat (or worse) of the 2008 downturn.

While the driving forces that produced the toxic instruments that were at the center of crisis remain a fiercely debated issue, there is consensus on the structural weaknesses that led to the systemic spread of their collapse. Regarding the forces that produced the toxic instruments, some claim that deregulation caused the rise of flawed residential mortgage-backed security (RMBS) portfolios, while others point to overreaching government policies that drove lenders to issue subprime mortgages.

Even with these differences, all sides agree the crisis was, at its core, an issue of transparency in the performance of the RMBS portfolios and the lack of liquidity of interests in these massive issuances.

Political and regulatory solutions of various sorts have been proposed and tried, but the time has come for another approach, one that recognizes the powerful advances in distributed ledger technology to help address these issues of transparency and liquidity. There is one technology that truly enables both: security tokens.

Security tokens

Security tokens serve as digital representations of any other tradable financial asset, including equity shares of companies, interests in funds, contracts entitled to a specific slice of future revenue streams, ownership of intellectual property, fractional ownership of real estate and other physical assets, and derivatives themselves. Security tokens can be regulated and effectively managed, making it easy to form capital and setting the stage for a reformed financial service infrastructure. After the experiment with initial coin offerings (ICOs) and utility tokens, the security token offering (STO), private placement offerings and how they are traded on exchanges is being done in a legal way, complying with existing regulations by the authorities in each jurisdiction in which they operate — including existing United States regulations from the 1930s.

With the yield curve inversion coupled with recent downturns and corrections in the stock market, fears of a building crisis are mounting. Many armchair economists predict an economic downturn is a certainty every seven to 10 years. As we reflect on the 10-year anniversary of the 2008 crisis and try to understand the disruption to global supply chains in a new environment of trade wars, it is important to analyze the fundamental problems that led us down this path of economic turmoil and why security tokens can help stave off future financial disasters.    

The beginning of the end

By September 2008, the $2 trillion RMBS market collapsed and sent a ripple through the balance sheets of most major financial institutions in the U.S. and abroad. This resulted in a global crisis of liquidity, as both debt and equity markets froze. At the eye of the storm was the bankruptcy of Lehman Brothers, which delivered subprime residential mortgages with seemingly reckless abandon. As loan default rates rose, RMBS portfolios were under increased pressure. This led to the U.S. government issuing the Troubled Asset Relief Program (TARP) — a $700 billion bailout to purchase distressed assets that yielded limited results — and the United Kingdom government’s $850 billion bank rescue package.

While the catalyst for this prevalence of bad loans is still up for debate, many agree that a potent cocktail of inefficiencies turned what should have been a salvageable market correction into a full-scale crisis. For one, credit rating agencies lacked effective models to rate risk after issuance and lacked objectivity in establishing ratings. Investors relied on these misguided ratings and continued to pump money into portfolios despite their eroding fundamentals. Lack of transparency and inefficient secondary markets made it difficult to price and expensive to sell these assets on the market. As a result, institutions were stuck with these assets and eventually collapsed under their own weight.

Another fundamental issue that led to the crisis — and has yet to be addressed by regulatory reform such as the G-20 coordinated reduction in interest rates and a $5 trillion expansion in April 2009, as well as developing concepts like the Volcker rule in the U.S. and ring-fencing in Europe — is the “too big to fail” nature of the offerings and players themselves.

The barriers of entry to securitization markets drove the centralization of issuances to astronomical heights, as a few participants came to dominate the market. The combination of closed circles and high costs of issuance ran securitized portfolios into the billions and caused a domino effect upon failure. In addition, a lack of liquidity in private securities markets made it difficult to rebalance or break up portfolios by selling smaller positions to a wider pool of potential buyers — or even by selling individual assets.

Coupling this with the significant leverage financial institutions were taking on, they reduced their ability to absorb loss, sending ripples globally. Sometimes, the unintended consequences of regulation are more damaging than the value proposition of that legislation.

Unfortunately, the issues behind this crisis remain in play and require a solution that addresses these deeply ingrained inefficiencies. If this goes unresolved, a complete financial collapse is no longer a matter of if, but when. 

The next phase

To combat the issues that led to the 2008 global financial crisis, the adoption of security tokens becomes mission-critical. Many analysts predict that the majority of financial products will one day be traded on the blockchain as security tokens, with programmable smart contracts — and for good reason: Only security tokens can bring greater transparency, oversight, access and liquidity to the market.  

This begs the question: Why are security tokens not more prevalent in institutional markets? In short, it’s a matter of skepticism born of misunderstanding and a lack of education. The cryptocurrency market most recognizable to the general public is one that consists of assets like bitcoin, which are exchanged principally for their speculative market value and lack tangible underlying value.  

The historical volatility and current state of the cryptocurrencies market certainly does not help the situation: 2018 is considered the worst year yet for cryptocurrencies by market cap, as the market plummeted from $800 billion in January 2018 to approximately $121 billion in December.

Complicating matters is the mistaken conflation of ICOs with true security tokens. After a barrage of ICOs left investors reeling from poor performance, data leaks and stolen funds, the public has rightfully grown skeptical of nondilutive assets sold to retail buyers and traded mainly by speculators. Another misleading factor is that many in the cryptocurrency space are wrongfully promoting security token offerings as ICOs with a veneer of compliance. Areas such as custody, insurance, risk and especially governance become center stage. 

The reality is that security tokens provide the benefits of liquidity and transparency while resolving the challenges of their blockchain-based predecessors by embracing compliance, protecting privacy while shunning anonymity and automating regulatory reporting. Even more profoundly, tokenized securities can provide the basis for a reformed financial service infrastructure that addresses each of the structural weaknesses that led to the global financial crisis. Here are the chief benefits of security tokens and the issues they help modify: 

  • Portfolio transparency: Unlike the 2008 RMBS portfolios, security token offerings provide investors with direct, real-time software driven access to portfolios and underlying financial assets. Investors can make their own assessments regarding portfolio performance, allowing the market to play out naturally as conditions change. Furthermore, these securities exist on blockchain and provide a transparent, immutable record of transactions, preventing issuers from “cooking the books.” Token holders are given the ability to manage their portfolios via direct access to transaction records that cannot be altered. Transparent record-keeping of transactions, investments, portfolio performance and origin of the assets every step of the way (you can look inside that cleverly structured security). Clarity around how more complex instruments have been pooled, broken up into tranches, rated — and by whom and when — directly for both the investor and the regulator, who are able to track the lifecycle of the asset, security or financial instrument.
  • Decentralized ratings: As a result of the transparency of security tokens, many entities are emerging with competing technologies to rate the value and viability of offerings in the security token industry. This trend combats the massive trust issues created from the easy manipulation of ratings in the traditional financial sector. This “decentralized analysis” also provides the basis for innovative new models to rate offerings in real time and employ advanced techniques, such as machine learning.
  • Efficient, objective pricing: As the STO market matures and institutional adoption broadens, stronger security token offerings backed by high grade investment offerings will enter the market. STO platforms will provide convenient models for access, trading and monetization. Market makers and other tools offered by these platforms will improve buying and selling opportunities, even with minimal market participants. This, in turn, provides efficient, market-based pricing for almost all tokenized assets.
  • Elimination of “too big to fail” offerings: Security token platforms provide streamlined compliance models and easy access to secondary markets. These capabilities promise to substantially reduce the costs of capital formation, creates a lower barrier to entry for all securities offerings and encourages innovation — leading to more investment choices and opportunities for diversification.
  • Liquidity at all market levels: Security token platforms provide seamless market access and dramatically reduce the cost of compliance and reporting. Accordingly, assets of any size can be brought to market and, in some cases, can be made available to the masses in a more scalable and inclusive way. Both institutional and retail investors will soon have the ability to efficiently monetize their investment interests, rebalance their portfolios and access opportunities that were previously only available to narrow circles. Furthermore, streamlining cross-border liquidity through global interconnected secondary exchanges that leverage instant settlement and atomic swaps allow for enhanced operational utility and access to broader liquidity pools. Previously, there was a total lack of liquidity and the unequitable secondary market that has emerged with retail investors being completely locked out of owning stock in Facebook, Uber, Palantir and other trophy assets prior to their IPOs, but only after achieving $70 billion+ valuations. One could argue the same about commercial real estate, which STOs will open up as an asset class to the public of single property REITs without diversified REITs. At a $120 billion valuation, Uber would be valued at more than double the average of companies in the Nasdaq 100 Index on a price-to-2018 sales basis. It gives the ride-hailing company a multiple of about 12 times, compared with an average of 4.8 times for the index. This is an illustration of the total failure of the current bulge bracket Wall Street IPO system. STOs could be the best answer to address this while complying with legislation written in the 1930s.
  • Control: Retail and institutional investors have greater control over the management of their assets through transparency, direct access and further empowerment to control the parameters of their investment portfolio. This, coupled with streamlined compliance frameworks and interconnected secondary markets, allows for more effective market making that promotes cross-border liquidity at a range of levels.
  • Access: Many more readily accessible investment opportunities at primary issuance and in secondary markets on both the issuance, investment and trading sides, reduce costs of both primary issuances, the barrier to entry for boutique investment banks, cross-border offerings and their trading through globally connected secondary market exchanges and to realize untapped liquidity pools from the private securities markets, which provides for more novel opportunities to both diversify and hedge risk related to portfolios and avoid correlated pooled investments. The cost of completing an IPO in the U.S. is simply prohibitive and ongoing compliance does not make economic sense for a world of Mittelstand companies ignored by today’s financial systems.
  • Compliance: Real-time regulatory reporting on cash flow, allows discrepancies and risks to be identified well ahead of time so that measures are taken by central bankers, policy makers and regulators to counteract any stresses to the financial system through monetary policy. Albeit this is more an application of DLT, broadly speaking, the use of security tokens better enables the process. Moreover, from a compliance standpoint, the underlying independently audited code of the security tokens can reflect the regulatory structures and regimes, and, in that way, are smart. They are coded to autonomously comply with the relevant regulations and laws, can be recalled, tracked and traced, all the while with compliance built directly into the security token itself.
  • New assets: The emergence of new financial instrument vehicles such as contingent capital in token form, which are essentially IOUs that imitate bonds and generate a return until maturity — when the principal is repaid and can convert into loss-absorbing equity — will reduce the lag time in needing to quickly and effectively pivot to absorb market shocks. Such derivative and creative securities should only be executed in a programmed software and immutable manner.

Adoption of security tokens is more vital now than ever. In recent weeks, part of the U.S. Treasury’s yield curve inverted, strongly indicating that a recession is on the way. The last time this occurred was June 2007 and served as a precursor to the crisis of 2008.

Luckily, the Nasdaq predicts that 2019 will be the year of the STO, as regulators in global markets are setting the stage for adoption and working toward creating stable regulatory environments. Hopefully, these measures serve as a positive harbinger of things to come and provide a vital tool as the U.S. and other jurisdictions try to navigate toward safer financial waters in 2019 and beyond.

In short, this is an important turning point where we have to decide if we want to seize the opportunity to rewrite the rules of the financial system with new DLT-based and DLT-compatible infrastructure for the creation of security tokens to make it more resilient, sustainable and safe in order to make sure history does not repeat itself.

The article is co-written by Dan Doney, Andrew Romans and Hazem Danny Al Nakib.

Dan Doney is a technologist and futurist, the CEO of Securrency Inc., a financial technology provider and former Chief Innovation Officer of the US Defense Intelligence Agency.

Andrew Romans is a Silicon Valley-based venture capitalist at 7BC.VC and Rubicon Venture Capital as well as an author of two top-10 books on Venture Capital on Amazon and Masters of Blockchain.

Hazem Danny Al Nakib is a financial and regulatory technology expert, a Partner at 7BC, and Managing Partner at Sentinel Capital Group where he works with corporates, governments, and startups leveraging digital emerging technologies.

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Hodl, IMF Now Declaring War on Cash After Negative Interest Rate Proposals

IMF Bitcoin

Cryptocurrency enthusiasts should hodl their coin reserves as the IMF declares war on cash following negative interest rate proposals. If anything, this is the best time for people to turn to cryptocurrencies to help preserve their wealth.

Time To Hodl Your Cryptocurrencies

For people who are already in cryptocurrencies, this is the best time to preserve wealth in digital currencies, not fiat if reports from Weiss Ratings is anything to go by. Meanwhile, no-coiners should be urged to ramp up, even if it means owning a percentage of a coin simply because saving is no longer a safe, more so if we draw events from devastated Venezuela.

According Weiss, the International Monetary Fund did declare war on cash following proposals to implement negative interest rates. In their tweet, Weiss Ratings says:

“The #IMF is the latest financial institution to declare war on cash. If they succeed, your fiat savings will go up in a puff of zero interest rate policies. This is why #crypto. #thisIsWhyWeHODL”

Negative interest functions in such a way central banks reduce interest rates with the aim of boosting economic growth. This move could see central banks reduce interest rates to negative figures. Undoubtedly, it implies that people would lose money through inflation as the government resort to stimulus in order to spur consumption and investment in an otherwise frail economy. By printing more to increase lending, boost demand, and stimulate the economy, the idea is to get people to spend instead of saving as this would help boost economies by decreasing interest rates but at the expense of high inflation.

Read: Ripple Co-Founder joining IMF Panel to Discuss Latest Financial Tech Innovations

The IMF, in a blog post earlier this year, suggests that one way to make negative interest rate work is to phase out cash. However, this effort could be arduous as paper money continues to be an integral part of payment processes in most countries.

Cash And Digital Currencies Could Work Together

The proposal by the IMF is for central banks to split their monetary base into two local currencies, cash and digital currencies (e-money). The digital currencies would be issued electronically and would have the policy rate of interest. Meanwhile, the paper cash would have an exchange rate against the digital currency.

There have been interest from some central banks across the world in developing digital currencies known as CBDC. The Central Bank Issued Digital Currencies (CBDC) would not work like cryptocurrencies. Instead, they would work like regular fiat currencies since they would be in the control of the central banks.

Reports over the past few months suggest that Sweden’s central bank is currently working on developing e-krona, the digital version of its local currency, the Krona. There are other countries that are exploiting similar moves, but no one has put together one yet.

Also Read: Why Ripple (XRP) Fits The Bill Of What The IMF Would Recommend To Global Central Banks

Regardless, saving your funds in cryptocurrencies seems like the best move at the moment. After all, the primary goal of Bitcoin was to take away financial control from the government and hand it over to the people. Specifically, Satoshi wants to avoid the calamities that took place following the 2008 global financial crisis.

If the negative interest rate gets a nod and countries follow the IMF lead, then it would significantly affect a large swathe of world’s population already struggling with hyperinflation or deflation. Therefore, to protect your funds from bank negative rate charges, resorting to cryptocurrencies is no brainer. Encouragingly, indicators show that Bitcoin and other cryptos are gradually gaining traction, becoming an excellent store of value as data from Venezuela and Iran shows.

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IMF Spring Meetings: Digital Money Is Imminent, But No Decentralization in Sight

As the IMF and the bosses of central banks gather to talk digital money, concerns of stability and institutional trust dominate the discussion.

The custodians of global financial order have been prominent in crypto news recently. The weekend kicked off with the announcement of the International Monetary Fund (IMF) joining forces with the World Bank to launch a private blockchain coupled with a “quasi-cryptocurrency” for training purposes, then continued with the Spring Meetings of the two organizations’ Boards of Governors in Washington, D.C., which ran throughout the whole week.

Although it would be an overstatement to claim that distributed ledgers were particularly conspicuous on the forum’s overall agenda, the program included a series of fintech workshops, as well as at least a couple of major talks relevant to grasping where global regulators stand on some issues pertinent to crypto and blockchain applications. Situated in the context of the IMF’s previous statements and actions, the ideas expressed at the meetings can update our understanding of the intellectual currents that shape how international financial institutions envision the future of blockchain technology.

Spring Meetings

Christine Lagarde, the IMF’s managing director, moderated the seminar entitled “Money and Payments in the Digital Age” that featured Benoît Cœuré, a board member of the European Central Bank (ECB); Central Bank of Kenya Governor Patrick Njoroge; JPMorgan Chase Chief Financial Officer Sarah Youngwood; and Jeremy Allaire, co-founder and CEO of crypto finance firm Circle. Predictably, speakers who represented established financial institutions and the fintech entrepreneur offered vastly different opinions on whether the digital payments model is superior.

While JPMorgan Chase’s Youngwood touted the bank’s new digital coin that is used for instantaneous settlement of wholesale payments, the Central Bank of Kenya’s chief talked about mobile-based payment service M-Pesa and ECB’s Cœuré introduced TIPS — a cost-efficient European service for the settlement of instant payments. Allaire, on his part, painted a future marked by a “fundamental redesign of how civic societies work,” in which economic activity is fully automated, effectively eliminating the notion of payments as we now think of them. Notably, he argued that not only the decentralized forms of money underlain by permissionless public ledgers would benefit from the internet-like open design, but sovereign digital money would as well.

Cœuré — the same ECB official who once had reportedly called bitcoin “the evil spawn of the financial crisis” — expressed confidence that central bank-issued digital money would be prominent in the financial system of the future, but warned that “decentralization, if not properly managed, can introduce fragility” to the system.

International Monetary Fund Managing Director Christine Lagarde along with Jeremy Allaire, Benoit Coeure, Patrick Njoroge and Sarah Youngwood talk about Money and Payments in the Digital Age at the IMF Headquarters during the 2019 IMF/World Bank Spring Meetings on April 10, 2019 in Washington, D.C. IMF Staff Photograph/Stephen Jaffe

International Monetary Fund Managing Director Christine Lagarde along with Jeremy Allaire, Benoit Coeure, Patrick Njoroge and Sarah Youngwood talk about Money and Payments in the Digital Age at the IMF Headquarters during the 2019 IMF/World Bank Spring Meetings on April 10, 2019 in Washington, D.C. IMF Staff Photograph/Stephen Jaffe

An overarching motif that loomed large in almost every speaker’s account was trust. However, if Circle’s Allaire was talking about trust in open networks based on public infrastructure for money, in which clearance and settlement are decentralized, other panelists obviously meant a different kind of trust — i.e., trust in the incumbent financial institutions that has to be maintained and preserved.

In an interview after the panel, Madame Lagarde made a nod to blockchain “disruptors,” who are “clearly shaking the system” and “changing business models of commercial banks.” Yet, she sounded much more in line with Cœuré than with Allaire when she remarked that she remains concerned about the trust and stability of the system, and that the IMF doesn’t want “innovation that would threaten stability.”

Interestingly, the IMF head noted, apparently in response to Allaire’s mention that Facebook was expected to roll out its own coin soon, that the organization is watching “data collectors” entering the financial space and is ready to regulate. The remark could be relevant to social services with payment ambitions beyond just Facebook, particularly the Telegram Open Network.

“New Economy Talk: CBDC: Should Central Banks Issue Digital Currencies?” was another event among the Spring Meetings germane to the domain of crypto. Moderated by Tommaso Mancini-Griffoli — the deputy division chief in the IMF’s Money and Capital Markets Department — the event had Deputy Governor Cecilia Skingsley of the Swedish Riksbank and Bank of Canada’s Deputy Governor Timothy Lane pondering the prospects of digitizing sovereign money.

In this discussion, the word “cryptocurrency” was mentioned just once, yet in a rather revealing context. When talking about the possible design and functionality of central bank digital currencies (CBDCs), Riksbank’s Skingsley contended that such an instrument will have to be highly functional and the best at fulfilling citizens’ needs — otherwise, “other versions of money could come in, perhaps cryptocurrency,” implying that government-issued digital money would stand in direct competition with its decentralized counterpart.

Lane expressed a number of concerns over the potential tokenization of central banks’ liabilities, including systemic risks like facilitating bank runs and displacing financial intermediation. He also pointed out that, with the existing cryptocurrencies, “anonymity is a big issue” and any digital instrument that Canada would develop will ensure that law enforcement has access to transacting parties’ data, if needed. By and large, the discussion proceeded along the lines of designing a convenient digital reincarnation of fiat money rather than envisioning paradigmatic changes in the nature of state-issued money that a crypto-libertarian would welcome.

Insights from Finance and Development

The ideas on digital money that most of the financial world’s notables expressed on the floor of the IMF-hosted forum largely resonate with those articulated in the June 2018 issue of the organization’s quarterly magazine, “Finance and Development,” dedicated almost entirely to the future of currency, and heavily focused on the threats and promises of blockchain. This issue — which, at the time of publication, did not make too much of a splash in the crypto community — is nevertheless a remarkable document that captures some themes that seem to remain influential with many financial bosses up to this day.

Title page of the June 2018 issue of Finance and Development, a magazine released and published by the International Monetary Fund

Title page of the June 2018 issue of Finance and Development, a magazine released and published by the International Monetary Fund

Some of the points that the authors raise are hardly shocking. Martin Mühleisen, director of the IMF’s Strategy, Policy and Review Departmentacknowledges blockchain’s capacity to revolutionize the world of finance, but reiterates common concerns over its potential to facilitate illicit activities. Andreas Adriano, a senior communications officer in the IMF’s Communications Departmentapplies Ken Galbraith’s taxonomy of financial bubbles to what he calls “crypto euphoria,” observing that most of the common features of historic financial euphorias are also visible in the irrational exuberance surrounding crypto assets.

In their primer on cryptocurrencies, economist Antoine Bouveret and the assistant director of the IMF’s Strategy, Policy and Review Department, Vikram Haksarpoint out that such assets are often costly to produce and that “decentralized issuance implies that there is no entity backing the asset.” They also mention that crypto assets might pose a threat to central banks’ ability to conduct monetary policy by weakening their centralized control over the money supply.

Perhaps the most forceful, in-depth and also the most unsettling analysis presented in the issue is the one penned by Dong He, deputy director of the IMF’s Monetary and Capital Markets Department. He affirms that crypto assets challenge the model of state-issued money and the dominant role of central banks, thus presenting direct competition to fiat money — a point that Riksbank’s Skingsley shared the other day. Further, he admits that the rise of cryptocurrencies might foreshadow a paradigmatic shift from account-based to token-based payment systems. He also contends that a situation in which crypto assets come to define the unit of account would mean irrelevance of central bank’s monetary policy.

His solution? Make fiat money — digital or not — a more attractive unit of account and settlement tool, naturally. That is also something we’ve heard a lot throughout the Spring Meetings sessions. But he also adds this to his recipe:

“Government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage crypto assets may derive from lighter regulation.”

In other words, the analyst suggests that regulation should be there not to protect consumers from fraud — or to stifle the financing of terrorism — but rather, it is needed to protect the dominance of the incumbent financial instruments and institutions. That is a step further from the usual way of rationalizing regulatory pressure on crypto, if at lease a more honest one.

Arguably the most refreshing article of the June issue of “Finance and Development” was written by a historian. Princeton professor Harold James reminds us that “money was almost always an expression of sovereignty,” which is a concise explanation of why crypto enthusiasts shouldn’t expect central banks to cede any of their power to open, decentralized financial systems. James also offers an elegant take on what he calls a “transformational shift in the perception of fundamental value.” He puts it that, in the past, value was created when humans applied labor to nature. In the near future — and bitcoin appears to be a harbinger of this change — value may arise from the application of nonhuman intelligence to stored energy.

Words and deeds

Whenever she talks about blockchain, Lagarde almost invariably brings up this ever-recurring maxim: Financial authorities should go about distributed ledger technology with caution, yet make sure that regulation does not stifle innovation. But what does this mean in practice? It seems that, feeling the weight of the responsibility for global financial stability on its shoulders, the IMF is not eager to rush the advent of a decentralized monetary system. Experiments will be tightly controlled, in a sandbox style; jurisdictions that try to shoot ahead too enthusiastically, like the Marshall Islands and Malta, will be reminded that they better simmer down. Stability and trust should remain paramount — and that means stability and trust in the incumbent institutions.

As is visible in the recent discussions and the analysts’ prior work, central bankers globally are well aware of the threat that open blockchains could pose in the near future to the monetary system that they are in charge of. The next decade will almost definitely see the emergence of CBDCs in many jurisdictions, but it is unlikely that these financial vehicles will be fundamentally different from a digitized version of the existing, centrally issued and controlled fiat money. The incumbents have resources to make digital fiat appealing to consumers and the regulatory power to limit competition from potential decentralized alternatives, so it may take a while before blockchain-powered, peer-to-peer financial networks have a chance to give central banks a run for their money.