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Central banks will provoke the next financial crisis
A central bank policy mistake is likely to cause the next financial crisis, says Dan Awrey, my guest on the latest episode of the New Money Review podcast. “The combination of near-zero interest rates and the restructuring of the financial system around near-zero rates means that central bank policy surprises are likely to be the match that lights the fire,” says Awrey, a professor of law at Cornell University, where he specialises in financial regulation.Formerly a legal counsel to an investment management firm and a practising securities lawyer, Awrey has conducted research for and advised governmental organisations around the world. These include the Bank for International Settlements (BIS), the UK Treasury, the UK Financial Conduct Authority (FCA), the Commonwealth Secretariat and the European Securities and Markets Authority (ESMA). He is also a founding co-managing editor of the Journal of Financial Regulation, published by Oxford University Press.I interviewed Dan Awrey a few days after three US government agencies issued a report calling for new laws to rein in the chaotic growth of the dollar stablecoin market. He was cited in the report as an independent expert.(Stablecoins are digital tokens designed to track a specified fiat currency and whose value is backed by holdings of assets denominated in that currency. Given their ease of use and transfer, they represent an increasing threat to bank deposits).In the 30-minute podcast discussion, we talked in detail about stablecoins. But I also asked Dan Awrey to explore some of the key policy issues facing financial regulators in the current era of near-zero interest rates, high levels of speculation and accelerating technological change.Listen in to the podcast to hear us discuss:What went wrong in 2008—and have we fixed it?The perennial challenge of shadow money and shadow bankingStructural weaknesses in the US government debt marketWhy near-zero interest rates distort financial regulationShould cryptocurrency be subject to the financial system’s rules?Stablecoin regulation and the safety of paymentsStablecoin reserve policy and credit risksUnbundling banking, payments and moneyDigital currency in the US, Europe and ChinaAre CBDCs the wrong approach to digital money?Payments data, social policy and the role of the private sectorWhy a central bank mistake is likely to spark the next financial crisis
Cryptocurrency—who’s in charge?
Cryptocurrency is an experimental technology. But it’s also now a $2.5trn market with growing and increasingly complex linkages to the traditional financial system—whether through ETFs, the futures market, central clearing, repo or prime brokerage.So who’s in charge if things go wrong, as they inevitably will at some point? To answer that question, I invited Angela Walch, a professor of law at St. Mary’s University in San Antonio, Texas, and a research associate at the Centre for Blockchain Technologies at University College London, to the New Money Review podcast.Walch was one of the first academics to look in detail at the governance of cryptocurrency, a topic often downplayed by promoters of the idea that cryptocurrency networks are decentralised, immutable and trustless. In a recent testimony to the US Senate committee on banking, housing and urban affairs, Walsh warned that “flaws in academic, industry, and public understanding of cryptocurrencies can taint policy decisions, embedding risk to be revealed when reality bites.”Listen to the podcast to hear Angela Walch share her views on:Why the reality of cryptocurrency governance doesn’t match the narrativeCryptocurrency and systemic riskThe declining trust in financial system governanceHow decentralised is bitcoin and DeFi?Where hidden power resides within cryptocurrency systemsPast episodes of critical bugs in bitcoin and ethereumInsider trading and information asymmetry in cryptoApplying the existing infrastructure rules to cryptocurrencyWhy we need a new regulator for cryptocurrency—and fastWhy crypto system operators gain limited liability by default
A 400-year-old stablecoin (and why it failed)
Stablecoins—digital currencies pegged to existing money, like the dollar, euro, pound or gold—are the hottest topic in finance. From crypto-market dollars like Tether and Circle to Facebook’s Diem project and tomorrow’s central bank digital currencies (CBDC), many stablecoins are staking a claim to be the payments medium of the future.But stablecoins are not a new idea, says Peter Wierts, a senior economist at the Dutch central bank, an associate professor at the Free University and our guest on the latest New Money Review podcast.In fact, their design closely resembles the money issued by the 17th/18th century Bank of Amsterdam, says Wierts, who authored a paper on the topic last year with economists from the Bank for International Settlements (BIS).Bank of Amsterdam money was the dominant global currency of its time, admired by Adam Smith and Voltaire.But eventually it went wrong—and in a way that carries lessons for today’s stablecoin operators, says Wierts.Listen in to the podcast to hear Wierts and New Money Review editor Paul Amery discuss:What ‘money’ means in a digital ageHow the Bank of Amsterdam resolved the problems of currency competitionWhy the Bank of Amsterdam is relevant for today’s stablecoins Stablecoins’ asset backing and why it mattersWhy the market value of stablecoins can differ from their intrinsic valueHow a stablecoin run can occur even with 100% backingWhy the Bank of Amsterdam started providing creditHow the governance of the Bank eventually failedStablecoin governance and the importance of incentivesThe timetable for the introduction of European Union’s new digital currency
Fighting the crypto scammers
“We’ve never been so busy,” says Nick Furneaux, a digital forensic investigator who specialises in cryptocurrency crime.Furneaux, our guest on the latest New Money Review podcast, works with law enforcement bodies and large corporates around the world, focusing on ‘the challenge of investigating crimes involving cryptocurrency’.Listen to the podcast to hear Nick and New Money Review editor Paul Amery discuss:How cryptocurrency created new avenues for crime“What bitcoin did was to provide a method of transaction that at its core is anonymous. This has given the criminal a new method to mix and hide funds. It’s more challenging for law enforcement to deal with.” “70-80 percent of arrested criminals have cryptocurrency wallets on their phones or computers. Our phone rings off the hook with calls from people who have lost money in scams, frauds and phishing attacks. On the ground, we’ve never been so busy.”“A sizeable percentage of bitcoin traffic—high teens—comes through the TOR network. One has to ask why. I’d suggest that the number of people using TOR for libertarian reasons is small in comparison to the number of criminals using TOR to obfuscate the movement of funds.”How criminals launder cryptocurrency“There are people who are willing to launder crypto for you. They’ll just charge a huge percentage and give you the cash.”The continuing frictions between cryptocurrency and banks“We had to buy £500 of ethereum the other day for a class I’m teaching on DeFi and decentralised exchanges—the bank froze my business bank account until I could explain why. The banks are very twitchy with any sort of crypto movement.”Why retail investors need to practise self-defence“If you go back five years, an awful lot of the money in crypto was criminal. Now there’s a lot of retail money. And people are going to want to deal with companies that will make restitution if things go wrong.”“If you’re going to get into cryptocurrency, make sure you understand the technology. Make sure you know the difference between a public and private key, and what a bitcoin address is compared to the private key that controls it. If you cannot understand that, do not get into crypto—you will just have ‘victim’ tattooed on your forehead.”The global challenge of solving cryptocurrency crimes“I don’t know how we solve the international issue. We’ve got countries that don’t care, and other countries that don’t have the people or the funds to train their law enforcement and legislators. We get calls from police forces around the world who can’t afford the blockchain forensic tools.”Why ethereum, DeFi and NFTs are the new frontier of crypto fraud“The biggest issue we are seeing criminally is what we generically term ‘crypto 2.0’—the ethereum blockchain with all of its tokens, and then the DeFi contracts. If a criminal stakes money into a DeFi contract and does so-called yield farming, they are earning clean money.”“We’re seeing art fraud associated with non-fungible tokens (NFTs). You take a picture you own to auction, buy it from yourself for $100k, pay the commission, then put it back up for sale for $60k and sell it to a third party who thinks it’s cheap.”
Fintech and the great rupture
The combination of finance and technology is driving us towards the biggest change in human history in 500 years, says Viktor Shvets, my guest on this week’s podcast.Shvets, a Hong Kong-based investment banker with Macquarie and a widely followed markets analyst, specialises in the intersection between finance, technology, politics and history. Viktor’s background—he grew up in the former USSR before moving to Australia in his early 20s—has given him a unique perspective into the great geopolitical shifts we’re living through.He’s recently turned that perspective into a new book, “The Great Rupture”, a study of the profound impact of technology and financialisation on our collective future.I found the book erudite, thought-provoking, convincing and at times a little scary.Here are some excerpts from the podcast discussion:The past is no longer a guide to the future“The recipe for success over the last 500 years is now changing very rapidly.”Economic success, personal and political freedom“Is it possible to be wealthy, prosperous and even innovative even though you don’t enjoy the same degree of freedom? The lessons of the last five centuries are that without freedom you can’t have those things.”The industrial age and the information age“There are fundamental differences between the two. In the industrial age, capital was scarce, most activities were highly capital-intensive and labour was a primary driver of productivity. That’s why you needed literacy and a skilled workforce.”“In the information age, we are drowning in capital and we have 5-10 times more than we require. Most activities these days are not that capital-intensive. The capacity constraints are much more fluid. And labour is losing marginal pricing power.”Capitalism is over“What we have right now is not capitalism. It’s just a question of how we define it and what are the rules for the new world.”Financialisation is driving us towards a black hole “We are rushing towards a black hole. On the other side, a different world lies. The two forces pushing us there are financialisation and the information age.”“Any idea gets very easily funded. The low cost of capital is like pouring kerosene on the bonfire of the information age. It’s accelerating the progress of technology.”Central bank money creation is no longer inflationary“The more you grow the money supply faster than nominal GDP, the more you create disinflation rather than inflation. Money is getting stuck in the cloud of finance, rather than reaching the ground where people live.”The end of the corporation“In the future, the idea of having a long-living corporation, transacting in its own name, will seem ridiculous.”Freedom may be optional“The mixture of technology and financialisation could lead us into a world where freedom becomes optional.”“Baby boomers’ obsession with freedom, choice and efficiency led to many bad outcomes, from environmental degradation to income and wealth inequality. Going forward, we will have less freedom. An emphasis on fairness and equality will be far more prevalent.”Curtains for Facebook, Amazon and Netflix?“The large digital consumer platforms are sunsetting. They’re suffering from diseconomies of scale and they are going to be attacked from a political, regulatory and societal level, as well as by start-ups.”
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