I first started reading FSB reports in 2009 just after the Global Financial Crisis (GFC). Back then my interest in FSB reports was banking remuneration, I was at that time an executive at a global investment bank with responsibilities for remuneration. Given that irresponsible remuneration practices where partly responsible for the GFC, the FSB took centre stage in setting out principle based guidelines on how banks should remunerate their executives. It was my job within my employer bank to analyse and implement these remuneration principles.
Fast forward to 2018, I find myself working in the Cryptoasset space and again reading FSB papers! Their papers are always well written and are rolled gold when it comes to credibility and authority so when I started reading their latest report titled ‘Crypto-assets’, it was like meeting an old friend as I thought back to my happy days at the bank. It was therefore slightly disappointing to find that their report did not cover what I consider to be the most important difference between Cryptocurrencies and Central Bank Money. That difference being decentralised Cryptocurrencies with fixed monetary policy versus centrally controlled Government currencies with discretionary monetary policy.
My disappointment increased as I came to realise that the report did not consider for a moment the potential benefits of Cryptoassets. My naive hope was that the report would at least reference some level of outreach to the crypto community. Instead their only action at this point is to encourage vigilant monitoring of developments.
Actually I have known this all along, but for some reason this particular report drove it home and made it is abundantly clear to me that the FSB and organisations like it will seek to curtail the development and adoption Cryptocurrencies. It starts with monitoring, then it is controlling. The paragraph that did it for me (again) reads:
‘New innovations that might add to efficiencies at the cost of safety represent an important challenge for central banks. Currently, ‘first generation’ private digital tokens (which include so-called ‘cryptocurrencies’ and crypto-assets) that are totally decentralised and do not represent a claim or underlying asset, make for unsafe money. Safer central bank issued cash may be less convenient in an era of electronic payments, and the use of cash is declining in some jurisdictions. At the same time, central banks are reviewing how to improve and modernise existing central bank operated payment systems. Central banks can encourage and catalyse improvements to current arrangements, as has happened recently in the field of faster payments. However, responding directly to the challenge with a central bank digital currency (CBDC) would be an entry into uncharted territory.’
After reading the above paragraph, I realised that I have gone from being inside the tent, reading reports as if they were the bible and implementing their recommendations, to being outside the tent and reading the reports through a different (I think wider/clearer) lens.
This has led me to think about a few questions.
How did the FSB fail to prevent the GFC?
To answer this we have to understand the purpose and history of the FSB and be clear about when the GFC ‘arrived’ so we can work backwards from that date.
The Financial Stability Forum (FSF) was formed in 1999 by the G7 ministers to ‘…promote stability in the international financial system…’. In April 2009, in response to the GFC, the FSF was re-established to become the FSB. In broad terms the FSB is a organisation made up of the Finance Ministers from the world’s richest economies (the G20 and some others) together with representatives of a number of global financial and economics bodies. It’s purpose is to promote global financial stability.
For me, the GFC officially arrived on Monday morning 15 September 2008 when Lehmans filed for bankruptcy, I remember this well as I was in New York at a remuneration meeting with my colleagues planning out the year end bonus rounds when the news broke. With this as the date I have gone back into publicly available reports issued by the FSF since before 15 September 2008 to see if there is any mention of the words sub-prime, credit default swap or mortgages backed security. Of the 113 reports I reviewed these words appear often but started appearing regularly in the last few reports. The main report on the ‘sub-prime crisis’ appears to have been issued by the International Organisation of Securities Commissions in May 2008. Anyway, it is clear from my reading that the FSF where aware of the risks in the sub-prime markets and that they were doing all they could to monitor and issue reports regarding same, they were however significantly limited in what they could do to head off the (now clearly seeable) conclusion to the US housing bubble. I don’t think the FSF can be accused of being asleep at the wheel, perhaps they can be accused of underestimating the magnitude of the coming disaster, but then, there are a lot of institutions in that boat.
My conclusion is that the FSF could not have done anything more to prevent the GFC, they could possibly have made louder warnings, but then it is hard to be heard over the noise of irrationally exuberant markets.
What will be the next big financial crisis?
I am not clear on ‘the when’, but I am clear on ‘the what’. The what is the collapse of one or more of the G20 currencies, the when could be within the next 20 or 50 years. It may be the collapse of US dollar, but I don’t want to go into armageddon theories here, there are plenty of those around. What I want to do is simply consider some numbers.
- Of the 195 countries in the world, only 60 of them are represented at the Bank for International Settlements (BIS) (the central bankers bank) and only 20 or so of them (plus a few territories) are represented at the FSB. I conclude from this that the BIS and FSB do not represent humanity as a whole, just the richer parts of humanity and associated trickle down economic theories.
- Of the 63 trillion dollars of world debt, 31.8% belongs to the US. This is a lot of money and there is no plan that I can see for repayment, I conclude that if the US dollar collapses then so will all other Central Bank Money.
- The average life expectancy for a government issued currency is 27 years, with the shortest life span being one month. I conclude from this that collapsing government issued currency is the norm, not the exception.
So the FSB’s report in this context is interesting because it’s analysis of Cryptoassets it is silent on the most important aspect of Cryptocurrency that being that it is distributed and fixed money versus centralised and discretionary. To me this should be the main aspect of the financial stability discussion/debate, not the payment channel versus security discussion, these are technology issues which are being solved (actually by blockchain tech developers). In my view, the FSB should focus on the economics of money, not the technology by which it is transferred. For this reason, unless the FSB changes it’s focus, it is a mistake to rely on the FSB for global financial stability solutions relative to the economics of money.
Could the FSB play a role in preventing the next big crisis?
If we believe that the next global financial crisis is the collapse of a G20 currency, then the right institution to lead prevention efforts is the FSB as this would involve not just all G20 countries but all international financial bodies such as the World Bank and the IMF. So Yes the FSB could play a role in preventing the next big crisis.
However, I don’t believe they will be able to change their current approach of focusing on technology, if they are to play a part in heading off this next crisis they instead should focus on the underlying economics of sound money. I don’t think this will ever happen. The members of the FSB would find it untenable to support research into the global adoption (or not) of a peer to peer electronic cash system or even to entertain a discussion/debate on the economic pros and cons of fixed versus discretionary monetary policy, I think they see this as an old debate and one which has been well and truly decided. I disagree and the existence of the whole Cryptocurrency space is evidence that this debate is still very much alive and far from decided.
How should the Crypto community react/treat/engage with the FSB?
Is it a complete waste of time to even consider this question? Probably, but I think it is at least worth trying and we should do so in a professional and constructive manner.
This said I don’t know how this is best done, perhaps this short paper is the beginning of something…but most likely not. If nothing else it is at least a record of one voice from the crypto world trying to have some kind of sensible opening discussion with one of the world most important financial stability bodies.
Final (for now) thoughts
The development of Cryptocurrency has shown us all how easy it can be to transact on a person to person basis without permission or censorship. People like this a lot and once the technology develops further they will want much more.
Cryptocurrency has also made us more aware of the weaknesses with discretionary monetary systems and for most of the world’s population Central Bank Money is already a failed experiment.
Cryptocurrency is a 10 year old experiment that has potential, Central Bank Money is an experiment that has potential, neither are perfect right now, but which model has most promise of being the best form of money in 20–50 years from now? and which form is the logical next step in the evolution of money? For me it is impossible to believe that it will not be some form of globally accepted Cryptocurrency. When the technical challenges are solved, sooner or later the FSB and others are going to accept that Cryptocurrency is the best form of money humanity has ever seen. When this change starts to happen in a serious way, it would help the stability of the existing financial system if the FSB and others positively engage with this technology.