With help from Derek Robertson
It’s been a rough stretch for the world’s top central bankers, who are facing pressure to tame high prices without crashing their economies now that persistent inflation has defied their predictions. It doesn’t help that they face this challenge amid an explosion of interest in cryptocurrencies, a technology invented to bypass their power entirely.
But the past few months have been even rougher for crypto. So as crypto markets melt down, central banks are not letting the moment go to waste.
Yesterday, when the Bank for International Settlements released its 115-page annual economic report, it devoted the final third to a detailed takedown of crypto and decentralized finance. The BIS is the most institutional of institutional players — an international organization that acts as a bank for central banks and is also owned by central banks.
The report seizes on the implosion last month of the algorithmic stablecoin Terra, arguing that the fiasco points to fundamental flaws that preclude the success of any monetary system that is not backstopped by central banks.
In short, the report contends that crypto is “unsuitable as the basis for a monetary system,” citing issues like scalability and trust. “A system grounded in central bank money,” it concludes, “offers a sounder basis for innovation.”
In recent years, papers published under the Bank’s aegis have gone from dismissive to defensive in their treatment of crypto. “Cryptocurrencies have failed,” declared a January 2020 report that surveyed central banks around the world. But late that year, crypto markets took off, and more recently, a couple of small countries have undertaken experiments in national adoption of Bitcoin as an alternative to sovereign currencies.
By this April, a paper it published on emerging market economies extensively discussed the risk that widespread use of cryptocurrency or a foreign-pegged stablecoin could lead to steep declines in the use of a country’s currency, undermining the capacity of its central bank to conduct monetary policy. The paper describes the existence of accessible payment systems for sovereign currencies as a “line of defence” against crypto adoption.
Meanwhile, a survey the Bank published last month found that 60 percent of central banks are pursuing their own versions of digital currency more urgently because of the growth in stablecoin and crypto markets.
So the ongoing meltdown in crypto markets and decentralized finance offers central bankers a welcome reprieve, as well as an opening to push for their own vision of the future.
The report argues that the incumbent system should co-opt innovations associated with crypto — like distributed ledgers and smart contracts — and even takes a stab at rendering the prosaic world of financial infrastructure in more poetic terms.
“The metaphor for the future monetary system is that of a tree,” it states, “With a solid trunk provided by the central bank, the tree hosts a rich and vibrant ecosystem of private sector service providers.”
The points marshaled against crypto’s viability aren’t exactly new. In fact, in arguing that that blockchain systems face inevitable tradeoffs between scalability, security and decentralization, it cites the work of Ethereum’s founder, Vitalik Buterin, who dubbed this tension the “scalability trilemma,” though Buterin and the Bank reach very different conclusions about the trilemma’s implications.
Buterin conceived of Ethereum at the age of 19. To understand the sort of the public figure he cuts, look no further than this 2019 video, where he plays a starring role in a painfully awkward rap-and-dance routine that celebrated technical upgrades to his blockchain’s code. Central bankers, on the other hand, have long enjoyed an air of august omnipotence.
So, it is striking to see their umbrella group publishing a diagram of “Buterin’s scalability trilemma” — not to mention asking readers to close their eyes and imagine a forest…
In that sense, the Bank’s report offers a memorable snapshot of this moment in time, as a pillar of the global system contends with a technological onslaught and makes its case for retaining a central role in governing the future.
In the interim between the leak of Roe’s then-impending reversal and the actual ruling overturning it, the Russian protest-slash-performance-art collective Pussy Riot took to the Texas state capitol, unfurling a 45-foot banner and minting an NFT to mark the occasion.
Over the weekend, a DAO, or “decentralized autonomous organization,” associated with the group began a new effort to expand and support abortion access — UnicornDAO, co-founded by Pussy Riot’s Nadya Tolokonnikova. On Saturday the group opened a crypto wallet, LegalAbortion.eth, to function as a donation hub for traditional abortion organizations like Planned Parenthood that don’t yet have a means of accepting cryptocurrency.
The DAO’s organizers will distribute funds from the wallet, which currently holds the equivalent of more than $10,000 in donations, to seven organizations including PPFA, NARAL, and a few regional and state-specific funds like Fund Texas Choice, according to UnicornDAO’s Twitter. (Tolokonnikova has experience in crypto altruism, also having helped found UkraineDAO, which raised millions of dollars to support the country in its war against Russia.)
Pussy Riot are among the many activists trying to use the frenzy around crypto — and the tight-knit, often feverish sense of community it engenders— as tools for fundraising, as we wrote about in DFD last week. — Derek Robertson
Coinbase, the U.S.’ biggest crypto exchange, is the latest stateside tech giant to find itself fending off European regulators.
As POLITICO’s Bjarke Smith-Meyer reported today, the company’s chief policy officer Faryar Shirzad traveled to Brussels last week to lobby regulators ahead of the EU’s forthcoming Markets in Crypto-assets regulation. The EU is widely expected to take an aggressive stance aimed at fending off scams and money laundering, as well as reducing exposure to catastrophes like the collapse of the not-so-stablecoin Terra.
Coinbase, however, is hoping to insulate itself from the potential far reaches of MiCA — namely, it doesn’t want to be liable for things like currencies collapsing, or for checking the identities of its users.
“It’s critical not to put platforms … such as ourselves in a position where we bear liability for things that are outside of our control,” Shirzad told Bjarke. “Our goal is to make sure that the liability rests on the right place.” What that “right place” is might ultimately depend on the means, legal or otherwise, by which crypto mavens make their money under a regime that’s growing more and more regulated by the day. — Derek Robertson
Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]); and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.
Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.
If you’ve had this newsletter forwarded to you, you can sign up here. And read our mission statement here.