Deutsche Bank Celebrates ‘Dollar Day’ by Accidentally Shilling Bitcoin

When the fat-cats at Deutsche Bank instructed their social media interns to draft a tweet commemorating National Dollar Day, they probably didn’t …
deutsche bank shills bitcoindeutsche bank shills bitcoin

German financial giant Deutsche Bank has accidentally made the case for Bitcoin while commemorating National Dollar Day. | Source: Shutterstock

When the fat-cats at Deutsche Bank instructed their social media interns to draft a tweet commemorating National Dollar Day, they probably didn’t realize that they’d accidentally end up shilling Bitcoin to their more than 650,000 followers.

But while the Bitcoin isn’t directly mentioned, it’s difficult to imagine anyone writing a better advertisement for the leading cryptocurrency.

It’s #NationalDollarDay! #OTD in 1786, Congress established the US monetary system and introduced the US dollar. In today’s money, one dollar from 1791 would be equivalent to 27.60 USD.

— Deutsche Bank (@DeutscheBank) August 8, 2019

Is Deutsche Bank a closeted Bitcoin admirer?

In the tweet, Deutsche Bank observes that since the U.S. monetary system was established on this day in 1786, the dollar has lost tremendous purchasing power. The German multinational notes that the equivalent of a single dollar from 1791 now has the purchasing power of about $27.60 today.

You do not need years of exposure to Bitcoin to appreciate that Deutsche Bank has by implication turned a negative spotlight on the world’s favorite reserve currency – and by extension, the worldwide fiat currency regime. The bank inadvertently made a case for an anti-inflationary currency that is not printed at the whim of unelected government bureaucrats.

With the maximum number of Bitcoins that will ever be in circulation capped at 21 million, the cryptocurrency was designed to be free of the inflationary risks that all fiat currencies have proven to be susceptible to. This was stated unambiguously in the Bitcoin whitepaper:

“Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.”

And yet the dollar is hardly the world’s worst fiat currency…

Deutsche Bank’s celebration of a fiat currency that has lost its purchasing power dramatically over the years is all the more significant for Bitcoin since the dollar is one of the world’s strongest currencies.

As of last year’s third quarter, the U.S. dollar constituted close to 62 percent of all the foreign exchange reserves held by central banks across the world.

Bitcoin vs USD on national dollar dayBitcoin vs USD on national dollar day
U.S. dollar dominance as a reserve currency | Source: Statista

This means that if your wealth is held in the dollar and you are a little apprehensive over its declining purchasing power, you should be outright panicking if you are holding other fiat currencies.

Bitcoin offers freedom from the tyranny of fiat

So how bad can it get? Well, unchecked printing of money by central banks has in the past led to the total collapse of fiat currencies with Europe, Latin America, and Africa offering standout cases.

Germany’s Papiermark in the 1920s is a perfect example from the 20th century when yearly inflation rose to over 300 million percent in the European country. Most recently, Zimbabwe provided another example of why a hard-capped cryptocurrency is the future when inflation rose to 500 quintillion percent.

Fortunately, there is no need to repeat these same mistakes in the 21st century with Satoshi Nakamoto already having gifted us the solution: Bitcoin.

Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.

Ex-Japan central banker says Facebook’s Libra will discipline weak economies

“If Libra becomes more widely used that the sovereign currency of a particular … Facebook will not offer the Libra digital currency until we have fully …

Facebook’s cryptocurrency project, Libra, continues to ignite mixed reactions from regulators to analysts. One commentator, an ex-Japan central banker has put his thoughts into the mix, saying that Libra will discipline weak economies across the world.

Libra V Economies: It will weaken fiat currencies across the world

Hiromi Yamaoka, former executive, Bank of Japan (BoJ), noted that if Libra receives mass adoption, there will be weakening of their fiat policies.

According to Yamaoka:

“If Libra becomes more widely used that the sovereign currency of a particular country, the effect of monetary policy may be severely undermined.”

In addition, he stated that countries with weak economies would have a hard time keeping up with Libra. Surprisingly, Yamaoka implied that countries with strong economies will still feel the impact, although “it won’t be a big problem.”

Yamaoka added that whether the economies are strong not, “the emergence of Libra would pressure policymakers to discipline themselves” by avoiding enacting measures that will negatively affect the value of their country’s fiat currency.

Libra’s composition will disrupt monetary policies

The ex-BoJ banker sees the major issue with regulators and policymakers concerning Libra is its composition. For instance, Yamaoka notes, Libra is backed by a basket of major fiat currencies, government securities, and real assets. Therefore, a slight change in the composition will disrupt the exchange rates among other markets factors. Consequently, it will touch on monetary policies.

“Any inconsistency in rules among countries creates a loophole that renders the rules ineffective.”

An important point to note is that the ex-BoJ executive’s comments are arguably made from an informed position. This’s because, at BoJ, Yamaoka led the payment and settlement systems division. Additionally, he was deeply involved in the Bank of Japan’s research into virtual currencies.

Yamaoka’s sentiments come a few weeks after Japan convened a working group to scrutinize Libra’s impact on currency policies.

As reported by Reuters:

“The working group, consisting of the Bank of Japan, the Ministry of Finance, and the Financial Services Agency …. Will seek to coordinate policies to address the impact Libra could have on regulation, monetary policy, tax, and payments settlement.”

Facebook postpones Libra’s launch

Currently, regulators are converging in drones to protests Facebook‘s move to launch a virtual currency. However, the social media giant has assured policymakers that Libra’s launch has been postponed until the regulatory issues raised are addressed.

According to David Marcus, who oversees the blockchain department at Facebook:

“The Libra association, which will manage the Reserve, has no intentions of competing with any sovereign currencies or entering the monetary policy arena. Monetary policy is properly the province of central banks. Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals.”

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PayThink The US needs to counter Libra with government backed crypto

The U.S. government would be cannibalizing its own hard cash for a virtual currency without giving up any leverage or strategic advantage. The U.S. …

Never did the expression “beat them at their own game” have more importance than with the Congressional hearings regarding cryptocurrencies. Now is the time for the U.S. government to act by issuing a government-backed cryptocurrency regulated by the Federal Reserve Bank.

The move would alleviate what could potentially become one of the most significant long-term threats to the U.S. economy—the creation and ownership of cryptocurrencies by global entities.

That would make these entities the custodians and power brokers of large ecosystems and economies.

Large commercial entities such as Facebook have the resources and scale to drive mass adoption and ubiquitous acceptance of a single cryptocurrency across the globe quickly. While Facebook’s Libra is front and center with Congress, legislators are missing the biggest issue. The concerns being voiced are around the stability of these types of currencies and consumer privacy.

While those concerns are indeed important, the biggest dilemma and issue with cryptocurrencies is the implication to the U.S. dollar and economy. Commercial enterprise-issued cryptocurrencies could potentially unhinge the dollar’s global dominance.

The only mechanism to eliminate that threat is a U.S. government-backed cryptocurrency. That would neutralize the threats posed by commercial enterprises.

The commercial threat has a one-two punch. The first punch comes from mass adoption and ubiquitous acceptance, which works to devalue the dollar.

The second punch comes from a shift in power/control of economies from government to commercial enterprises.

While mass adoption of any single cryptocurrency could be a long way down the road, it is a real potential threat to global economic stability. As a cryptocurrency gains acceptance, it picks up intrinsic value. Not value in the traditional sense whereby the currency itself is worth more, but value in the sense that more people find it useful and become less dependent on hard cash and fiat currencies.

The best analogy is the adoption of payment cards and accounts across the globe. While payment cards and accounts have not completely displaced cash, they have gained ubiquitous acceptance and have continued to eat away at the use of cash and checks.

The value of the cards is very apparent in the stock prices for companies such as American Express, Discover, MasterCard, and Visa. These companies make their money on the transaction fees from the cards, and as card adoption and use rise, so does revenue for the companies.

Increasing or decreasing the number of cardholders and card use has a mirroring effect on a company’s bottom line and stock price. For example, when Costco didn’t renew its contract with American Express, Amex’s stock dropped and projected earnings were restated.

Similarly, the value of a particular cryptocurrency comes from utility and adoption. Having a U.S. government-issued cryptocurrency would mitigate the exposure from reducing the use of the U.S. hard currency around the world and potentially increase the U.S. backed cryptocurrency adoption.

The U.S. government would be cannibalizing its own hard cash for a virtual currency without giving up any leverage or strategic advantage. The U.S. government could gain greater adoption as developing economies move toward digitalization.

A U.S. government cryptocurrency would also be regulated and under the jurisdiction and monetary policy of the U.S. Federal Reserve System. Similar to the EU’s attempt to use the Euro to bypass U.S. sanctions with Iran, crypto currencies have global trading ubiquity.

Because a commercially issued cryptocurrency is not regulated, users can circumvent government laws and regulations.

Cryptocurrency knows no borders and is not bound by government fiduciary responsibility to a country of origin. Once a cryptocurrency becomes an acceptable form of tender to consumers and businesses alike, it eliminates the potential need for conversion to a fiat currency, such as the dollar.

Having a U.S. government backed-cryptocurrency would be akin to a fiat currency, which in this would be the U.S. dollar. This would mitigate some of the risk associated with a non-fiat based ubiquitous global currency.

Cryptocurrencies put the power and control of a tender’s value and the markets it serves in the hands of the creators. If it is a commercial enterprise, it eliminates the need for a central banking system that regulates and monitors monetary policy.

The U.S. central banking system, created by the Federal Reserve Act in 1913, was established to provide financial stability and soundness to the country. Financial stability and soundness of the U.S. economy has remained the primary mandate for the Federal Reserve System, which has independent control over the country’s monetary policy.

Commercially issued cryptocurrencies undermine that system. While commercial organizations may attempt to clearly articulate how cryptocurrencies would be backed and could be stabilized, there are many conflicting interests.

Ultimately creators of cryptocurrencies can have far-reaching direct and indirect influence over the underlying investments backing the tender. Not only can the cryptocurrency creators change the investment structures and instruments, they can pour their own capital in or out of these instruments and investments to alter the value of the currency. A U.S. government-issued cryptocurrency eliminates the possibility for commercial entities to directly and indirectly control the currency value. This neutralizes the potential conflicts of interest coming from commercial entities, preserves the government’s monetary policy role, which ultimately protects the citizenry and economy.

It would be difficult to convince anyone that cryptocurrencies are going away. Therefore, the race is on for global acceptance and dominant market share. The market leaders that drive adoption fastest will become powerful strategic global economic players and influencers. Given the implications to the U.S. dollar from mass adoption combined with the ability to control the tender’s inherent value are serious threats to the U.S. markets and economy, the U.S. government should be that leader. That is why it is time for the U.S. to win this game and step in by issuing a U.S.-backed cryptocurrency before any other entity parlays the market opportunity.

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Is the future stable for Libra?

Libra looks like a stablecoin, an initial coin offering (ICO), a money market fund, and an electronic funds transfer (EFT) – all in one. And, of course, it sits …

In the words of its designers “Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets – the Libra Reserve – and supported by a competitive network of exchanges buying and selling Libra”.

“Those celebrating the end of the traditional banking system or government financial hegemony, hold on.”

The idea is to make moving money around the world – even for those who are currently unbanked – as easy as sending a text message.

Apparently, confidence in Libra will be built over time because “anyone with Libra has a high degree of assurance they can convert their digital currency into local fiat currency”. This freedom of convertibility also allows the total outstanding stock of Libra to grow and shrink with user demand.

Libra looks like a stablecoin, an initial coin offering (ICO), a money market fund, and an exchange-traded fund (ETF) – all in one. And, of course, it sits on a blockchain platform.

But first things first: is it even a currency?

Jostling for position

According to the Financial Stability Board, the standard attributes of a currency are its ability to be a means of payment, a stable store of value, and a mainstream unit of account. Some of these tests are harder to pass than others. For instance, almost any asset – money or otherwise – can be a store of value. Even moneyless barter systems rely on commodities as means of payment.

Certainly Libra’s success at becoming a simple, global currency depends on its widespread acceptance. But does it require becoming a commonly used unit of account?

That would mean its use in the pricing of commodities and global trade generally – and jostling for position with the US dollar. Can it stage such a coup?

A key to Libra’s adoption is being a stable store of value, with its designers claiming “the value of a Libra today will be close to its value tomorrow and in the future”. A big failing of crypto-assets is their extreme instability of price – and stablecoins were created for precisely this reason.

So how will this stability be achieved? Libra will be backed by a reserve of assets to give it intrinsic value. Those celebrating the end of the traditional banking system or government financial hegemony, hold on – the reserve of assets will include bank deposits and short-term government securities in currencies from stable and reputable central banks. Like an ICO, the original investors keep the interest paid on the assets held in the Libra Reserve.

Beyond the benefits of low price volatility, the asset reserve supposedly protects Libra from the bank runs that beset fractional reserve currencies. But this claim is based on a misrepresentation of what it means for a currency to be ‘backed’ and what a bank run means.

Existing precedents

Bank runs occur because of a mismatch of asset liquidity and the convertibility obligation associated with bank-issued money, not because there is no backing. Libra will be no different in this respect, since some of its backing will be government (and other good quality) bonds. Central banks, with their ability to be lender of last resort, exist to assist banks in converting non-money assets in the face of a bank run. Libra has no such support.

The Libra reserve will consist of short-dated assets, however, and this will help with liquidity management. These self-liquidating assets are likely to be government bills and repurchase agreements (‘repo’). This makes a lot of sense and means Libra also shares characteristics (and will compete for assets) with money market funds.

A precedent exists for this sort of liquidity management. The traditional English banking model entailed holding self-liquidating assets. To support a nation of shopkeepers and traders, the business of banking consisted of discounting short-term bills of exchange and hence the system’s asset base continually provided the means to retire its money issuance.

(In the US, which was geared up to support the infrastructure – railways, roads, buildings – of a new nation, banks had to find ways to remove long-lived and hence illiquid assets off their balance sheet. Hence securitisation is a largely US invention.)

Another option is for the Libra Reserve could be held on deposit with central banks. But in many monetary jurisdictions such deposits yield zero or even negative rates of interest thereby removing the income necessary to support the currency. The Reserve would earn better rates of interest at commercial banks.

So although the Libra bank will have a flow of funds to help support its convertibility option, the flow will not be in terms of Libra itself. This currency mismatch means that Libra issuance itself is not being managed.

A much better idea (and it seems to be part of their plan) is for the asset reserve to consist of credit assets denominated in Libra. When these are repaid (and this will itself drive the demand for Libra) the stock of Libra will have a natural reduction mechanism.

The Libra bank could become a lender itself and even replace traditional lenders to become a ‘mono-bank’. This is unlikely; it would be better (especially given its initial design) to encourage, and then stand behind, a private Libra credit system as the lender of last resort.

In the meantime, the creation (‘minting’) and destruction (‘burning’) of Libra will be solely handled by ‘authorised resellers’ who have the authority to manage the conversion of Libra to and from the currencies in its underlying basket. These authorised resellers bring to mind the authorised participants (APs) and official liquidity providers (OLPs) who support ETFs and ensure parity between their exchange value and the value of their asset backing.

Yet what remains obscure is how this conversion is to be handled in practice. We know that the value of Libra will track the value of the underlying reserve and the basket of currencies may change ‘occasionally’.

The conversion of coins will depend on the interest rates associated with the currencies in the reserve basket. Higher interest rates in the reserve currencies will increase the opportunity cost – and hence the burning – of Libra coins. It is not clear Libra reduces the power of monetary policy but interest rate changes could test the capabilities of the authorised resellers.

Reserve value

Libra is a new form of stablecoin. The value of Libra will not be pegged to the value of an established currency or even a basket of currencies at fixed exchange rates. Instead its value – and terms of convertibility into other currencies – is linked to the value of the Libra Reserve.

Again, this makes sense, since it solves the problem central banks had with bimetallic standards and Gresham’s Law. If Libra were linked to a basket of currencies in fixed exchange rates then risk-free profits could be made by converting the cheapest currency in the basket into Libra and then converting it back to the highest value currency. To prevent this, the rates would need to change constantly; otherwise the ability to maintain convertibility would dissolve.

Ultimately Libra aims to be a borderless version of PayPal by solving cross-currency payment problems with its own currency. But its usefulness will depend on goods being priced in Libra or its being incredibly cheap to convert in and out of (including price stability while holding Libra).

So it looks very much like the authorised resellers will hold an important position in the Libra system. They are the ones who will have to handle any imbalances in local currency flows and the basket – all at a modest cost to Libra users.

This liquidity-support mechanism is a novel feature of ETFs yet to be tested in a crisis.

Adding to the uncertainty, ETF Authorised Participants are usually large banks or brokers, but very few have expressed an interest in performing the equivalent role for Libra.

James Culham is Director, Institutional Portfolio Management at ANZ

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A rand-backed cryptocurrency – here’s how it could work

Cryptocurrencies, such as Bitcoin and Ethereum, have become well known for their volatile value. In contrast to this, ‘stablecoins’ are cryptocurrencies …

Cryptocurrencies, such as Bitcoin and Ethereum, have become well known for their volatile value.

In contrast to this, ‘stablecoins’ are cryptocurrencies that have been specifically designed to have a stable value, notes Seshree Govender, a senior associate at Webber Wentzel, who questions whether a rand-backed stablecoin could work.

Stablecoins are crypto assets which are backed by the value of a ‘stable’ asset, or a basket of assets.

As the value of the backing asset will not necessarily be subject to the same fluctuating circumstances applicable to the value of cryptocurrencies, pegging a stablecoin to an asset can stabilise the value and inherent purchasing power of the stablecoin cryptocurrency so that it may be used as a viable and economic medium of exchange as opposed to a speculative asset.

While stablecoins can be stabilised by various types of backing assets, the most widely recognised is fiat currency. Such stablecoins are backed on a 1:1 ratio with a particular fiat currency value (e.g. the rand).

Fiat-backed stablecoins are thus, able to operate as a form of digital cash that is issued and circulated through a decentralised economy and payment system.

Introducing the rand-backed stablecoin

A rand-backed stablecoin would be a cryptocurrency with a stable value and purchasing power equal to that of the rand.

For a rand-backed stablecoin to operate as an effective and sound medium of exchange, the issuing/minting and the redemption/burning of the rand-backed stablecoin must be carefully administered.

The issuing/minting of a rand-backed stablecoin should only occur upon the issuer receiving a fiat rand to back the coin’s value.

The stablecoins in circulation at any given time must be backed on a 1:1 value basis with the fiat rands received and held in trust by the issuer.

Once an issued rand-backed stablecoin is presented by the bearer to the issuer for redemption of the fiat rand value backing the coin, the issuer must give effect to the redemption and burn the stablecoin(s) redeemed by removing it from circulation.

A rand-backed stablecoin can be issued on a decentralised payment network comprising of the relevant merchants and consumers that will utilise the stablecoin as a method of payment; the stablecoin service providers; and the issuer, all of whom will serve as the verifiers and authenticators of stablecoin based transactions.

This decentralised payment network will be built on a distributed ledger that will serve as an immutable record of the circulation of the rand-backed stablecoins, the collective coin value and/ or stablecoin transactions.

Is this deposit-taking?

Setting aside the cryptocurrency debate as to whether a fiat-backed stablecoin is a true cryptocurrency where the custodian of the fiat reserves and issuance of the coins itself are centralised, a more pertinent legal question to be asked is whether the issuing/ minting and redemption/ burning of a rand-backed stablecoin can be regarded as deposit-taking which is the business of bank.

A “deposit” is defined in the Banks Act as an amount of money paid by one person (the depositor) to another on the condition that the value of such money will be repaid by the latter person to the depositor, on the demand.

As the act of deposit-taking is the business of the bank, this raises the question as to whether the issuer of a rand-backed stablecoin may only be a registered bank under the Banks Act.

Is this e-money?

In a position paper published by the South African Reserve Bank in 2009, “e-money” has been defined as “monetary value represented by a claim on the issuer.

This money is stored electronically and issued on receipt of funds, is generally accepted as a means of payment by persons other…” The definition of e-money aligns quite closely to the economic operation of a rand-backed stablecoin.

As such, the introduction of a rand-backed stablecoin, within the current South African payments environment, may be regarded as e-money taking the form of a cryptocurrency.

Importantly, while e-money currently flows through the established South African payments clearing and settlement system, a stablecoin version of e-money would not necessarily do the same and would instead utilise a decentralised payment network for clearing and settlement.

Is this legal tender?

In asking the deposit-taking and e-money questions pertaining to the introduction of a rand-backed stablecoin, it’ noteworthy that the concept of “money” or “monetary value” is an inherent requirement to both the meaning of a “deposit” and the “e-money” payment instrument.

Essentially, before asking whether only banks can issue rand-backed stablecoins or whether stablecoins can perform the same payment function as that of e-money, one must first ask whether a rand-backed stablecoin will be regarded as legal tender.

In terms of the ‘Consultation Paper on Policy Proposals for Crypto Assets’ issued by the Intergovernmental FinTech Working Group in 2019, the regulatory working group has taken the view that crypto assets would not be regarded as legal tender.

Based on the manner in which the regulatory working group has defined a crypto asset in the policy paper, a stablecoin would fall directly within the ambit of a crypto asset despite being backed by fiat currency.

As such, on the current stance taken by the regulator, a rand-backed stablecoin will not be regarded as legal tender despite serving the same purpose as that of e-money, (albeit moving through a different payment system).

Arguably the issuer of rand-backed stablecoin will not need to be a bank as the issuance of a coin may not necessarily be regarded as deposit-taking.

Furthermore, rand-backed stablecoins will not necessarily be required to move through the established South African clearing and settlement payments system as it is not a recognised payment instrument such as e-money.

Minding the gap

Enabling the issuing and circulation of a rand-backed stablecoin may open an interesting avenue of innovation in the South African payments industry by providing a decentralised means of issuing monetary value and clearing and settlement payments using such stablecoins.

The introduction of a rand-backed stablecoin may be able to achieve financial inclusion in the payments industry through its nature as a decentralised value and payment system.

However, it will only be able to achieve such innovation if such stablecoins can be regarded as legal tender.

As South Africa is currently transitioning from a traditional and financially exclusive payment regulatory regime to a more innovative and inclusive regime, the introduction of a rand-backed stablecoin, which it not regarded as legal tender as yet, may bring with it systemic risk and potential detriment to the payments industry if done without sufficient regulatory consideration and supervision.

The recent auditing concerns surrounding the US Dollar-backed “Tether” stablecoin and its fiat currency reserves illustrates the potential risk that can arise in the instance where the custodian of the fiat currency reserves and issuer of the fiat-backed stablecoin are not institutions subject to regulatory oversight.

Read: Sabvest invests in cryptocurrency startup Revix

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