{"id":14915,"date":"2022-01-06T12:45:44","date_gmt":"2022-01-06T11:45:44","guid":{"rendered":"https:\/\/www.worldpolicyconference.com\/?p=14915"},"modified":"2022-01-06T12:45:44","modified_gmt":"2022-01-06T11:45:44","slug":"benoit-coeure-technology-breakthroughs-2022-markets-vs-central-banks","status":"publish","type":"post","link":"https:\/\/www.worldpolicyconference.com\/fr\/benoit-coeure-technology-breakthroughs-2022-markets-vs-central-banks\/","title":{"rendered":"Beno\u00eet C\u0153ur\u00e9 : Technology breakthroughs 2022: Markets vs. central banks"},"content":{"rendered":"<p><span class=\"posted-on\"><time class=\"entry-date published updated\" datetime=\"2022-01-05T08:00:00+01:00\">JANUARY\u00a05,\u00a02022<\/time><\/span><\/p>\n<header class=\"entry-header\">\n<div class=\"section-meta entry-meta posted-by\"><a href=\"https:\/\/www.gisreportsonline.com\/e\/krecke-elisabeth\/\">ELISABETH KRECK\u00c9<\/a><\/div>\n<\/header>\n<p class=\"introduction\">Could cryptocurrencies one day bring down the banking system? These decentralized technologies have already shown\u00a0the potential for disrupting finance, which craves a faster, cheaper, and freer system. If people choose control over their money and identities over security, the fears of financial authorities may be realized.<\/p>\n<p><img decoding=\"async\" src=\"https:\/\/www.gisreportsonline.com\/wp-content\/uploads\/2022\/01\/gettyimages-1192541630-1140x760.jpg\" alt=\"European Central Bank President Christine Lagarde and former Executive Board member Benoit Coeure in 2019 cryptocurrencies banking system\" \/><\/p>\n<p>With trust in financial institutions like the European Central Bank once again fraying amid the Covid-19 pandemic, ex-board member Benoit Coeure called on regulators to adapt to the rapidly changing technological landscape.\u00a0<span class=\"image-copyright\">\u00a9 Getty Images<\/span><\/p>\n<h2 class=\"toc-only\">In a nutshell<\/h2>\n<ul>\n<li>The crypto boom is threatening conventional finance<\/li>\n<li>Covid-19 has revived discontent with financial authorities<\/li>\n<li>Central banks and regulators will not stand idly by<\/li>\n<\/ul>\n<div id=\"pos-bulletpoints\" class=\"psf bulletpoints\" data-mw-id=\"pos-bulletpoints\">\n<ul>\n<li>Central banks and regulators will not stand idly by<\/li>\n<\/ul>\n<\/div>\n<p class=\"has-drop-cap\">Could cryptocurrencies bring down the banking system \u2013 and, with it, the authorities who oversee it?\u00a0 Two years ago, such a question would have made central bankers laugh.<\/p>\n<p>It no longer does. During a September Eurofi conference in Ljubljana, seasoned European policymaker Benoit Coeure laid out an alarming scenario: \u201cThe financial system is shifting under our feet.\u201d In a speech intended above all as a wake-up call for financial supervisors, the French economist insisted that \u201ccentral banks have to act while the current system is still in place \u2013 and to act now.\u201d<\/p>\n<h2 id=\"h-unforeseen-obsolescence\">Unforeseen obsolescence<\/h2>\n<p>The centralized financial system as we know it could in fact disappear. Not in a tragic fight to the death, nor following a systemic collapse at a larger scale than the one that triggered the 2008 banking crisis. Rather, this time, the traditional banking system may be silently pushed to the margins after having become inadequate, irrelevant, and outdated \u2013 in other words, incapable of adapting to a drastically changing world.<\/p>\n<p>What worries Mr. Coeure most is the crushing technological superiority of decentralized cryptocurrencies, which \u2013 after only a few years in existence \u2013 have proved they have the potential to disrupt finance.<\/p>\n<p>The former European Central Bank (ECB) executive board member is no tech fearmonger. Since 2020, as the chair of the Innovation Hub at the Basel-based Bank of International Settlements (BIS), he has been on a mission to help policymakers and technocrats around the world develop central bank digital currencies (CBDCs).<\/p>\n<p>The ex-central banker is convinced that CBDCs (i.e., digital versions of fiat currencies) are the only option central banks have today if they want to stay in the game \u2013 let alone to maintain their leading role in the financial system. The problem, Mr. Coeure recognizes, is that CBCDs will take years to be rolled out, while privately issued digital assets and stablecoins are already there.<\/p>\n<h2 id=\"h-dangerous-animals\">Dangerous animals<\/h2>\n<p>Meanwhile, there are several thousand cryptocurrencies in existence; the top 20 make up about\u00a0<a href=\"https:\/\/www.statista.com\/statistics\/863917\/number-crypto-coins-tokens\/\" target=\"_blank\" rel=\"noreferrer noopener\">90 percent of the market<\/a>.<\/p>\n<p>In spite of extreme price fluctuations of the top cryptocurrencies since their inception, more and more people are tempted to jump ahead. As of June 2021, there were already\u00a0<a href=\"https:\/\/crypto.com\/images\/202107_DataReport_OnChain_Market_Sizing.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">221 million users worldwide<\/a>, including 120 million using bitcoin alone. This boom has only just begun.<\/p>\n<p>The pandemic played an important part in what appears to be a bandwagon effect. The hype surrounding crypto \u2013 or to be more precise, sugarcoated marketing playing down people\u2019s legitimate fears and concerns \u2013 has fueled investors\u2019 optimism bias: the overconfident belief, common to all gamblers, that they are going to win rather than lose big.<\/p>\n<p>Despite their growing popularity, bitcoin and other cryptocurrencies are still far from being a conventional way to invest money. Investors are often blind to the fact that bitcoin, after all, has no intrinsic (i.e., real) value. Normally, investments are made in view of future income. This is not the case for bitcoin; as one\u00a0<a href=\"https:\/\/www.gobankingrates.com\/investing\/crypto\/crypto-risky-12-experts-weigh-in\/\" target=\"_blank\" rel=\"noreferrer noopener\">financial analyst<\/a>\u00a0put it, \u201cone cannot invest in BTC, one can only speculate in BTC.\u201d<\/p>\n<blockquote class=\"wp-block-quote\"><p>It is no coincidence that the pandemic has revived markets\u2019 discontent with monetary authorities.<\/p><\/blockquote>\n<p>Stablecoins, for their part, appear less volatile and therefore less exposed to the risk of a brutal price crash. In contrast to bitcoin, they are tied to the value of fiat money (usually the United States dollar) or any other asset with real value (such as gold, silver, oil). Still, it remains difficult for the inexperienced investor to learn his or her way through a seemingly opaque and chaotic market.<\/p>\n<p>Fabio Panetta, the Italian economist who replaced Benoit Coeure at the ECB\u2019s executive board in 2020, has used harsh words to describe what he even refuses to call \u201ccurrencies.\u201d \u201cCrypto-assets are very dangerous animals,\u201d he said.<\/p>\n<p>He is not wrong; but does it make sense to think that such high-risk assets could be the future of money? Is it really conceivable that the banking system, central bank money and their powerful guarantors of last resort \u2013 states and central banks \u2014 could be swept away? Perhaps only if a problem emerged, shaking the markets\u2019 perceptions of central bank money and policy.<\/p>\n<h2 id=\"h-broken-trust\">Broken trust<\/h2>\n<p>Indeed, such a problem may have come to light in 2008. Bitcoin\u2019s inception in 2009 is often viewed as an act of defiance against the centralized banking system. The global financial crisis revealed that misconduct had for long become the norm in the banking industry, and that much of the regulatory frameworks in place had been a failure.<\/p>\n<p>To repair those frameworks, central banks were given new assignments. Not only did they become intransigent banking supervisors and regulators; they aspired to become a new kind of fiscal power, in command of steering the economies in times of crises and beyond.<\/p>\n<p>The ECB is a case in point. It stretched to breaking point its original, narrowly defined mandate of maintaining price stability in the eurozone. Unlike other central banks, it had to face a sovereign debt crisis \u2013 which, in 2012, almost brought down the EU\u2019s common currency. Even if markets\u2019 trust in sovereign money could be restored (through then-President Mario Draghi\u2019s famous commitment to do \u201cwhatever it takes\u201d to save the euro), it never fully recovered.<\/p>\n<p>It is no coincidence that the outbreak of the\u00a0<a href=\"https:\/\/www.gisreportsonline.com\/r\/government-intervention-europe\/\">Covid-19 pandemic<\/a>\u00a0and its host of authoritarian policy responses (previously unseen in democratic nations) revived markets\u2019 discontent with monetary authorities. For instance, savers increasingly perceive the persistently low (or sometimes even negative) interest rates as an illegitimate tax on their deposits. For long, they meekly accepted the creeping expropriation as a necessary (and temporary) evil in times of crises. Their tolerance level is dropping as they suspect that central banks will monetize part of governments\u2019 colossal\u00a0Covid debt through inflation.<\/p>\n<p>With inflation on the rise and no end to financial repression in sight, crypto attracts even low-risk-profile investors. Some adopt a devil-may-care attitude, weighing the probability of losing (but also gaining) money in a gambling game against the certainty of losing in the fiat system. In a way, they send a message to central banks: \u201cyou\u2019ve gone too far.\u201d<\/p>\n<h2 id=\"h-freedom-call\">Freedom call<\/h2>\n<p>What the crypto rush reveals above all is that markets crave alternative finance. They want it to be faster, cheaper, more rewarding \u2013 and, above all, freer.<\/p>\n<p>Safety is important too. But, as revealed by the ECB\u2019s recent public consultation on a digital euro, privacy is valued very highly by customers these days. Maybe the stringent transparency requirements imposed by the current banking regulations \u2013 obsessed with money laundering, tax evasion and financing of terrorism\u00a0\u2013\u00a0have simply become too intrusive for the taste of many citizens.<\/p>\n<p>Crypto entrepreneurs have heard the message. As one prosperous\u00a0<a href=\"https:\/\/celsius.network\/about-us\" target=\"_blank\" rel=\"noreferrer noopener\">start-up<\/a>\u00a0advertises its financial offering: \u201cOur goal is to disrupt the financial industry, one happy user at a time, and introduce financial freedom through crypto.\u201d<\/p>\n<h2 id=\"h-unbank-the-world\">Unbank the world<\/h2>\n<p>Newcomers have recently challenged commercial banks\u2019 business models by creating open-source protocols that replicate existing financial instruments within a decentralized architecture. Their blockchain- and smart contract-based services promise to revolutionize payments, savings, lending, trading, asset management, derivatives, and insurance.<\/p>\n<p>The pioneers of decentralized finance (DeFi) share a common goal: knock off their pedestal the middlemen and gatekeepers that have domineered centralized finance so far. Today, DeFi is among the fastest-growing sectors in the crypto world. According to one of the\u00a0<a href=\"https:\/\/www.deftfinfo.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">players<\/a>\u00a0involved, its market size is already measured in the trillions.<\/p>\n<div id=\"pos-factsfigures\" class=\"psf factsfigures\" data-mw-id=\"pos-factsfigures\">\n<h2>Facts &amp; Figures<\/h2>\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" class=\"wp-image-29617\" src=\"https:\/\/www.gisreportsonline.com\/wp-content\/uploads\/2022\/01\/crypto-1-1140x576.jpg\" alt=\"A chart of overall global crypto users and those who have ever held bitcoin and Ethereum, January-June 2021 cryptocurrencies banking system\" \/><figcaption>The number of overall global crypto users continued to surge in 2021 \u2013 reaching 221 million users worldwide by June \u2013 along with the growth of those who have ever held bitcoin and Ethereum, the two top cryptocurrencies.\u00a0<span class=\"image-copyright\">\u00a9 macpixxel for GIS<\/span><\/figcaption><\/figure>\n<\/div>\n<p>Yet it may still only be in its infancy. For the moment, DeFi is a playground essentially for experienced investors, with knowledge barriers remaining\u00a0<a href=\"https:\/\/www.circle.com\/en\/digital-dollar-stablecoin-solutions-for-defi\" target=\"_blank\" rel=\"noreferrer noopener\">high<\/a>.<\/p>\n<p>Technology might soon render possible a large-scale investor revolution. Once access to DeFi gets easier, retail bankers might have a real reason to worry. DeFi markets could attract virtually anyone who has a smartphone and an internet connection.<\/p>\n<p>Moreover, 1.7 billion adults worldwide are excluded from the traditional banking sector. DeFi could provide microfinance solutions to those unbanked, usually low-income individuals, opening up new prospects. In the world of DeFi, no credit amount is too small to be granted. Financing opportunities might arise that so far would have been unthinkable.<\/p>\n<p>One can only imagine the positive impact on developing countries \u2013 not to mention those where authoritarian or irresponsible governments destroy the value of national currencies and the wealth of citizens.<\/p>\n<h2 id=\"h-bridge-builders\">Bridge builders<\/h2>\n<p>So far, DeFi is largely unregulated. Permissionless and censorship-resistant ecosystems enable perfectly anonymous users to interact on peer-to-peer trading platforms \u2013 at their own risk. None of the compliance procedures or mandatory disclosure requirements at the heart of today\u2019s banking system, such as Know Your Customer (KYC) or Anti-Money Laundering (AML), need to be applied in those settings.<\/p>\n<p>This scares off many potential users, notably in Western countries, where regulation is highly valued. Some companies are currently exploring a new market niche by providing crypto-services to those who want to take a safer road, preferring to turn to \u201cregulated\u201d institutions that trade and store crypto-assets on their behalf.<\/p>\n<p>Market leaders Celsius and BlockFi present themselves as \u201ccentralized\u201d blockchain-based companies, which perform KYC and comply with AML. In a way, their platforms create a bank-like environment meant to give crypto-beginners a sense of security \u2013 albeit a distorted one, as the companies\u2019 accounts have been hacked more than once.<\/p>\n<p>In order to provide investors with more secure and easy access to cryptoassets, other DeFi platforms seek to bridge the gap between blockchain-based finance and traditional capital markets. For example, Defi Technologies Inc. offers so-called\u00a0<a href=\"https:\/\/www.circle.com\/en\/digital-dollar-stablecoin-solutions-for-defi\" target=\"_blank\" rel=\"noreferrer noopener\">digital-asset-exchange-traded-products<\/a>\u00a0(ETPs), listed on regulated stock exchanges.<\/p>\n<blockquote class=\"wp-block-quote\"><p>Central banks and regulators will not stand idly by while decentralized finance cuts the ground from under their feet.<\/p><\/blockquote>\n<p>\u201c<a href=\"https:\/\/www.circle.com\/en\/digital-dollar-stablecoin-solutions-for-defi\" target=\"_blank\" rel=\"noreferrer noopener\">Crypto-banks<\/a>\u201d and digital asset investment firms currently have the wind in their sails. They are the ones that could precipitate society\u2019s move to digital finance.<\/p>\n<p>The question is, for how long?\u00a0 Sooner or later, big incumbent banks might challenge them, building blockchain infrastructures of their own. But only a few have so far been able to get a foot into crypto, let alone disrupt the disrupters.<\/p>\n<p>A\u00a0<a href=\"https:\/\/www.mckinsey.com\/industries\/financial-services\/our-insights\/global-banking-annual-review\" target=\"_blank\" rel=\"noreferrer noopener\">recent study<\/a>\u00a0revealed a widening of the gap between leading banking institutions and those lagging behind. It looks as though crypto is already sorting out winners from losers.<\/p>\n<div id=\"pos-conclusion\" class=\"psf conclusion paragraphs-only\" data-mw-id=\"pos-conclusion\">\n<h2>Scenarios<\/h2>\n<p>Central banks and regulators will not stand idly by while decentralized finance cuts the ground from under their feet. They will come up with new regulations.<\/p>\n<p>Already, in September 2020, the European Commission\u00a0<a href=\"https:\/\/www.mckinsey.com\/industries\/financial-services\/our-insights\/global-banking-annual-review\" target=\"_blank\" rel=\"noreferrer noopener\">published a proposal<\/a>\u00a0for a regulation of the \u201cMarkets in Crypto-Assets\u201d (MiCA). The document was drafted largely in reaction to Facebook\u2019s Libra announcement, perceived as a threat to national currencies. In the meantime, Libra (rebranded Diem) was watered down to a simple dollar-backed stablecoin and is nowhere close to being issued. DeFi, on the other hand, gained momentum precisely in 2020-2021 \u2013\u00a0and is at risk of becoming MiCA\u2019s first collateral damage.<\/p>\n<p>Fortunately or not, MiCA is expected to enter into force only in late 2024. By then, many of its provisions may be obsolete. Compared to regulators, crypto innovators move at lightspeed.<\/p>\n<p>Policymakers are \u201cincreasingly worried about being left behind,\u201d Benoit Coeure\u00a0<a href=\"https:\/\/www.bis.org\/speeches\/sp211007.htm\" target=\"_blank\" rel=\"noreferrer noopener\">admitted during a conference<\/a>\u00a0in Geneva. Could CBDCs get them back into the race? Mr. Coeure seems skeptical: \u201cThe time has passed for central banks to get going,\u201d he said in Ljubljana.<\/p>\n<p>A\u00a0<a href=\"https:\/\/www.bis.org\/about\/bisih\/topics\/cbdc.htm\" target=\"_blank\" rel=\"noreferrer noopener\">2021 BIS study<\/a>\u00a0confirmed that even though most central banks have a keen interest in CBDCs (and some already \u201cexperiment\u201d with the technology), only a handful are actually running pilot programs.<\/p>\n<p>The People\u2019s Bank of China is a front-runner. The ECB is among those that still \u201cinvestigate;\u201d it\u00a0<a href=\"https:\/\/www.ecb.europa.eu\/paym\/digital_euro\/html\/index.en.html\" target=\"_blank\" rel=\"noreferrer noopener\">recently stated<\/a>\u00a0it wanted to get \u201cready\u201d to launch a digital euro, but will not necessarily do so.<\/p>\n<p>A host of technical (notably security-related) issues remain unsolved. The potential disintermediation of banks is another tricky problem. For the banking sector, a retail CBDC \u2013 if not well managed \u2013 could become a threat far greater than DeFi.<\/p>\n<p>Finally, there is the question of why consumers would prefer CBDCs to decentralized cryptocurrencies.<\/p>\n<p>The likes of Mr. Coeure hope that if privacy and safety principles were to rule, central banks will come out on top. The precise opposite might happen: the fact that digital cash gives central banks the power to track end-users\u2019 spending in real time may in fact have a deterrent effect. Citizens today may be used to a high level of surveillance, but CBDCs could become the straw that breaks the camel\u2019s back.<\/p>\n<p>At some point, people might want to regain control over their money and identities. Many will desert centralized finance and turn to privacy-protecting DeFi platforms. Self-sovereign identity at consumer scale could become a pillar of the future financial landscape.<\/p>\n<p>Read the original article on <a href=\"https:\/\/www.gisreportsonline.com\/r\/cryptocurrencies-banking-system\/\">GIS<\/a><\/p>\n<\/div>\n<p><\/p>","protected":false},"excerpt":{"rendered":"<p>JANUARY\u00a05,\u00a02022 ELISABETH KRECK\u00c9 Could cryptocurrencies one day bring down the banking system? These decentralized technologies have already shown\u00a0the potential for disrupting finance, which craves a faster, cheaper, and freer system.<\/p>\n","protected":false},"author":3,"featured_media":14916,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[153],"class_list":["post-14915","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news-room","tag-153"],"_links":{"self":[{"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/posts\/14915","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/comments?post=14915"}],"version-history":[{"count":0,"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/posts\/14915\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/media\/14916"}],"wp:attachment":[{"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/media?parent=14915"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/categories?post=14915"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.worldpolicyconference.com\/fr\/wp-json\/wp\/v2\/tags?post=14915"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}