Banks Must Adopt Blockchain, Or Become Obsolete

It might seem that,because of China’s e-yuan launch, governments around the world have been clamoring to get a digital version of their currency. The consensus is that a central bank digital currency (CDBC) will give the nation behind it 21st century economic advantages as well as the opportunity to blaze a trail into the blockchain wilderness.

Ever since cryptocurrencies swept the world in 2017, the discussion of what to do about their inner workings never went away. It was suggested that the accounting methods used by today’s banks are rendered “legacy” compared to what can be done with blockchain. Even now, with little in terms of official response past a crypto card and study promises, crypto transfers flourish. El Salvador made bitcoin an official medium of exchange, in other words, outsourcing the role of CDBC to a market-proven cryptocurrency. Ukraine recently joined the line-up of nations legalizing crypto.

And it looks like things might be staying this way for a while.

Top bankers giving crypto a second look

As reported by the Bank Administration Institute, banks might simply attempt to integrate the crypto market into their systems with a plug like ACH or Fedwire (the often-dismissed “legacy” payment services). It’s a way to speed things up and avoid disruption when things are getting out of hand, but in a good way.

Some banks outside of the top 10 in the U.S. have already made a good effort out of converting to a wholly blockchain system. But even after all this time, they still mostly offer U.S. dollar tokenization. That’s not quite the same as full-bore crypto adoption; more of a workaround intended to enable dollar transfers on blockchain without actually transacting in cryptocurrencies.

Perhaps this is the ideal way of going about things. A wholly decentralized financial market, plugs included. Maybe the future of DeFi is more about blockchain technologies than the cryptocurrencies that run on blockchains?

“Crypto is a challenge to traditional banking”

Still, Benoît Cœuré, head of the innovation hub at the Bank of International Settlements (BIS), sees the crypto market as a possible challenge to the banking system:

Decentralized finance (DeFi) platforms are challenging traditional financial intermediation. They all come with different regulatory questions, which need fast and consistent answers… But make no mistake: global stablecoins, DeFi platforms and big tech firms will challenge banks’ models regardless.

“Financial intermediation” means the middleman business. Specifically, Cœuré is telling banks they’re missing out on the market-making business. DeFi lets private individuals lend and borrow from one another without a single bank standing in the middle, taking its share of the profits.

He’s sounding a wake-up call: “Hey, stodgy old financial institutions! A bunch of early adopters are eating your lunch, and if you don’t get to the table soon there’ll be nothing left but crumbs!”

Cœuré goes on to praise CBDCs, stating that countries should work together on acquiring one. While he doesn’t tell us why, he does mention how CBDCs preserve today and lay the groundwork for tomorrow. It seems that Cœuré sees digitalization as a way of preventing a sovereign currency from getting out of hand.

For banking corporations, even the largest ones, what’s at stake is profit and market share.

For global central banks, what’s at stake is much larger. If they don’t move fast, they stand to lose control of their own economies. A CDBC offers all of the ease-of-use benefits of cryptocurrencies, and all the “benefits” of a national currency: legislation, regulation, control over interest rates and inflation. Cœuré is telling central banks what they need to do in order to stay relevant as institutions in an age of cryptocurrencies and decentralized blockchain-enabled smart contracts.

If digitalization is a necessary measure, that means things are already failing on other fronts. Cœure, too, notes that stablecoins just as stable as those we expect from governments are already here. One can purchase or own them on the independent market. While Cœure acknowledges that central banks seem unwilling to get into the “nitty-gritty”, the market has long moved past the point where the actions of one bank can have a serious negative effect.

Cœuré is announcing, loud and clear, that central banks must act. Cryptocurrencies aren’t going away, and they can’t be ignored any longer. They’re such a serious threat to economic control and authority that we need to see a FedCoin, a EuroCoin, a YenCoin and all the rest.

The alternative is to either outsource CBDC creation like El Salvador did, or simply to close up shop and brush off the résumés. Those are the choices facing banks today.

The ‘Rotten Equilibrium’ of Republican Politics

the 20 most prosperous districts are now held by Democrats, while Republicans represent 16 of the 20 least prosperous, measured by share of G.D.P. The accompanying chart illustrates their analysis.

.. The authors’ calculation of the contribution to the G.D.P. of every congressional district showed that Democratic districts produce $10.2 trillion of the nation’s goods and services and Republican districts $6.2 trillion.

This trend creates a significant dilemma for Trump and the Republican Party. Candidates on the right do best during hard times and in recent elections, they have gained the most politically in regions experiencing the sharpest downturn. Electorally speaking, in other words, Republicans profit from economic stagnation and decline.

Let’s return to John Austin of the Michigan Economic Center. In an email he describes this unusual situation succinctly: “A rising economic tide tends to sink the Trump tugboat,” adding

“Certainly more people and communities that are feeling abandoned, not part of a vibrant economy means more fertile ground for the resentment politics and ‘blaming others’ for people’s woes (like immigrants and people of color) that fuel Trump’s supporters.”

The small- and medium-sized factory towns that dot the highways and byways of Michigan, Indiana, Ohio and Wisconsin have lost their anchor employers and are struggling to fill the void. Many of these communities, including once solidly Democratic-voting, union-heavy, blue collar strongholds, flipped to Trump in 2016.

This pattern is not limited to the United States. There are numerous studies demonstrating that European and British voters who are falling behind in the global economy, and who were hurt by the 2008 recession and the subsequent cuts to the welfare state, drove Brexit as well as the rise of right-wing populist parties.

..In a July 2018 paper, “Did Austerity Cause Brexit?” Thiemo Fetzer, an economist at the University of Warwick in Coventry, England, argues that austerity policies adopted in the wake of the 2008 financial collapse were crucial both to voter support for the right-wing populist party UKIP in Britain and to voter approval of Brexit.

the EU referendum (Brexit) could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. These reforms activated existing economic grievances. Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onward as austerity started to bite

.. The results here and in England reinforce the conclusion that the worse things get, the better the right does.

As a rule, as economic conditions improve and voters begin to feel more secure, they become more generous and more liberal. In the United States, this means that voters move to the left; in Britain, it means voters are stronger in their support for staying in the European Union.