If you have ever thought that cryptocurrency is nothing more than a passing fad destined to go the same way as bell bottom slacks and disco, think again. When the world's number one central bank starts raising concerns about cryptocurrency's dominance, it's a good sign that platforms like Bitcoin and Ethereum aren't going away.
For the record, that is exactly what has happened. The Bank for International Settlements (BIS) just issued its annual report for 2019. The report not only gives considerable attention to cryptocurrency, but it also addresses the entry of big tech into financial services quite extensively. It is clear that BIS is worried about companies like Facebook inserting themselves into financial services with their own digital coins and blockchain technologies.
While the annual report attempts to give at least some positive credit to big tech, it is obvious from the overall language that the BIS is concerned. Bank officials clearly want regulators to step in and keep the playing field level so as to not allow any form of cryptocurrency - be it Bitcoin or Facebook's Libra project - to get too big.
About the BIS
It is interesting to note that the BIS of bills itself as an international financial institution that "fosters international monetary and financial cooperation and serves as a bank for central banks." When you closely analyze just what the BIS (https://www.bis.org/about/index.htm) does, it is clear that the playing field is already not level. It is heavily weighted toward the BIS and the central banks it serves. So when this organization calls for a level playing field, what they really want is to prevent any other financial entity from competing with them.
In terms of what the BIS actually does, it provides banking services for central banks like the U.S. Federal Reserve and the Bank of England. Those central banks need a facility through which they can transact business among themselves. That facility is the BIS.
It is also worth noting that the BIS is technically owned and operated by the central banks it serves. As such, its leadership makes monetary policy that affects different fiat currencies around the world. Its monetary policy also impacts national economies. That means by extension, the BIS' monetary policies also impact the global economy.
From a more technical side of things, the BIS candles settlements between central banks. Their system is also used to address settlements between commercial and retail banks, effectively giving the organization a hand in settling all international transactions. If you send money overseas through a commercial or retail bank, that transaction will eventually make its way onto the BIS network where it is ultimately settled.
Big tech concerns
One wonders if BIS had its annual report completely compiled and edited prior to Facebook announcing the launch of Libra. Much of the big tech language included in the report seems aimed at Facebook. At any rate, the BIS is clearly fearful of big tech and its entrance into financial services.
One of their chief concerns is the fact that big technology companies already have a robust and reliable network infrastructure more than capable of handling international transactions. It is not as though Facebook will have to build an entirely new infrastructure to support Libra. Moreover, its infrastructure dwarfs that of the BIS and its a central bank supporters.
This is a concern for the BIS because big tech companies can leverage their infrastructure to make financial transactions more convenient and efficient. A company like Facebook can take advantage of the ocean of information it already possesses to determine who would benefit most from its stablecoin, who is most likely to buy and trade with the coin, and so forth.
The BIS is concerned that big tech's advantage in both infrastructure and data indicate that companies like Facebook could quickly go on to dominate the global financial sector. The BIS and its central banks are not prepared to compete.
In addition to big tech's advantage in technology, the BIS is also concerned about:
- Banking Norms - The traditional financial services sector operates on a long-established collection of norms that govern how they do business. Big tech can largely ignore those norms in everything from determining credit worthiness to requiring collateral for loans.
- Easier Payments - Efficiency is a big thing when it comes to international payments. Facebook has already said it intends to target developing countries with poor performing fiat currencies and troubled cross-border payments. The BIS is worried that big tech's ability to make payments easier could accomplish what it has not been able to.
- Lack of Regulation - The BIS is also concerned that current regulations are not designed to handle the entry of technology companies into financial services. As such, the situation is one of little to no regulation of cryptocurrency and blockchain. This may leave customers vulnerable.
- Privacy Issues - The financial services industry already grapples with privacy issues. So does big tech. However, the BIS believes that such issues will only be exacerbated if big tech companies end up being highly competitive in the financial markets without regulation.
Reading through the annual report makes it clear that what the BIS is really concerned about is losing ground to big tech. They see the potential of both cryptocurrencies and stablecoins to completely disrupt fiat currency and everything tied to it. They can see that cryptocurrency has a decided advantage because it is decentralized and very difficult to regulate.
Let us just say that the BIS' worst fears were realized. What would that mean for the organization, central banks, and the world's commercial and retail banks? Most importantly, what would it mean to the average consumer and business owner?
A world without central banks
Though it is unlikely to ever happen, let's just assume Facebook and a few competitors go on to enjoy such great dominance that the BIS and central banks all but disappear. The way businesses and consumers would transact business would be astoundingly different.
For starters, it is likely that the many diverse fiat currencies now in use throughout the world would be replaced by multiple digital coins. However, those coins would not be tied to specific nations. Rather, there would probably be one or two coins responsible for handling the bulk of the world's international payments. Then you would probably see individual coins designated for specific industries.
You might have a coin that becomes the universal trading facility for gambling online. Wherever you wanted to play slots, for example, would be fine as long as you have enough digital currency. There would be another coin for the travel industry, one for retail, and so forth.
Smart contracts would automatically facilitate the conversion between coins on the fly. That means consumers wouldn't have to own two dozen different coins. They also would not have to convert from one coin to the next just to get a transaction done. Everything would happen automatically and in the background.
Another remarkable change would be realized in terms of faster payments. Without central banks and the BIS having to go through their long, drawn out settlement process, payments could be completed much more quickly. If you play MegaMoolah.com online with Bitcoin or Litecoin, you are already familiar with this concept. A cryptocurrency transaction is nearly instantaneous, and it settles usually within 10 minutes or less.
Removing the settlement issue from the equation also removes a lot of the dead weight that now goes into making payments. There is no need for settlement when parties are directly exchanging coins with one another. And even when a payment processor is involved, that processor can facilitate the exchange of coins without going through the same long settlement process that now governs fiat.
Finally, a world without central banks would be one in which national and global economics were more organic. This is to say there would be no central bank regulators manipulating national economies through monetary policy. The decentralized crypto economy would be controlled entirely by those who participate in it: consumers, businesses, coin minors, and network maintainers.
Perhaps this is really what the BIS fears most. There is no need for the BIS if central banks are no longer part of the economic equation. Both the BIS and its central banks would lose the power they have held for so long.
It is no surprise that the BIS is calling on regulators to step up and take control before Facebook and a few other big tech operations make any more headway into cryptocurrency. Make no mistake that the BIS is concerned about its own future. It's hard to imagine they want a truly level playing field. Instead, the BIS wants to continue to maintain its dominance in global finance and economics.
The silver lining here is the reality that the BIS wouldn't be so concerned if cryptocurrency were just a passing fad. But with their alarm bells going off, it's clear they believe that crypto and blockchain are here to stay. They want both regulated so as not to upset the proverbial apple cart they push.