“Trust”, “security”, and “technology”
…were the key words at the International Monetary Fund (IMF) Spring Conference in early April in Washington D.C. The panel discussion focused on “Money and Payments in the Digital Age”. The participants, Benoît Cœuré (ECB), Sarah Youngwood (JP Morgan), Jeremy Allaire (Circle) and Patrick Njoroge (Central Bank of Kenya) agreed that trust and security are essential in all monetary and payment matters. However, the views diverged on when and how these requirements are to be met. Christine Lagarde moderated the discussion.
JP Morgan Coin
As expected, Sarah Youngwood praised her own JP Morgan Coin. Like Bitcoin, it is based on Distributed Ledger Technology (DLT). Its development was completed in mid-February. That Youngwood’s boss, JP Morgan CEO Jamie Dimon, had called Bitcoin a fraud in September 2017, was not mentioned in this round. Although it is not known if his opinion has changed fundamentally, the JP Morgan coin shows that the company has recognized the potential of blockchain technology. Youngwood pointed out that the coin’s internal payments to around 200 affiliated banks are transparent, secure, and sound. It would meet all the requirements for the verification of personal data and business data of new customers for the prevention of money laundering and terrorist financing.
Trust in Decentralized Systems
Jeremy Allaire, CEO of Circle, founded the crypto payment company in 2013. He was the strong voice of Bitcoin in the round and cited the tremendous value of the internet that people trust primarily because they receive added value. And with money, it is the same thing: He said “It is hard for people to grasp a world where they could first of all control their own assets rather than have to entirely rely on an intermediary like a bank. And where they can transact with any other person on the planet, instantly with zero counterparty risk and they can do that on virtually no cost. ” But once people have experienced that, they would not want to go back. Decentralized networks and open source technologies such as the Internet, e-mail and messenger services would not be controlled by governments or corporations. Nevertheless, this public infrastructure would be trusted, and that was said to be the future of digital money. The path leads away from classical centrally-controlled systems towards decentralized systems. And consumers and business would not want to look back because of then having a much better, superior system.
Trust in Financial Institutions
For confidence in financial institutions, Sarah Youngwood argued that, globally, “financial institutions are the most trusted group of institutions. More than governments, more than NGOs and six times more than tech companies for the US.” – These claims are in stark contrast to the Edelman Trust Barometer. For years, the financial services in this online survey have been at the very end of the scale of the industrial sectors. Lastly, when more than 33,000 people were surveyed in 27 markets at the end of 2018, they again at 57 percent ended up in last place. Incidentally, technology led the scale at 78 percent. The Edelman Barometer merely confirms Youngwood’s statement that governments are rated even worse. However, this applies in principle to all branches of industry.
“The Banks Will Stay”
Ultimately, the key issue was how to build and maintain trust in financial systems. Benoît Cœuré cannot imagine a financial system without centralized organizations. Without being explicitly asked, he immediately stated in his first statement that banks would stay. “You need this ecosystem and the associated competition”, he affirmed. For some, it may have sounded like whistling in the dark. He sees the role of central banks, no matter where they go, to ensure that money remains safe, efficient, reliable, and the support of the associated infrastructure.
Trust Through Mathematics
Jeremy Allaire made it clear that with cryptocurrency, mathematics has taken the place of human beings to justify trust in financial systems: “Cryptographic proof is a dramatically better way for society to organize around important information rather than relying on fallible humans or corruptible intermediaries”. He put it down to the common denominator: “In Crypto we trust” and “We believe in mathematics”, respectively. Crypto and blockchain is more than just payment, it is a fundamentally new infrastructure to store important information. He even predicted that there will be digital special drawing rights in the next 12 to 24 months. The special drawing right is the computing unit of the IMF. It is being redefined daily, based on the prices of the US dollar, the euro, the yen, and the British pound.
Setting High Safety Requirements
Sarah Youngwood then pointed out that there has been Bitcoin fraud rather than any other form of payment that existed, literally saying, “There is cash and then there is Bitcoins in terms in the amounts of frauds.” Allaire responded that crypto assets were the same as digital bearer instruments that arouse desires like any bearer instrument. Therefore, it was not about the matter itself, but about setting the security requirements high enough. The representative of the ECB also pointed out that there would always be fraud. Fraud has a lot to do with abuse of identities or weak identification, but it has nothing to do with technology.
Central Banks Welcome DLT
In a follow-up interview on CNBC, Christine Lagarde summarized the topic. Ultimately, it is about securing the stability of the monetary system. Everything that has to do with DLT, whether it’s called digital currencies, cryptocurrencies or assets, shakes the system. The distributed ledger technology is welcomed by regulators and central banks and is changing the business model of commercial banks. However, one should not lose sight of the trust in the system and its stability. The IMF is not interested in innovations that shake up the system so that it loses the necessary stability.