Greg Medcraft is the Director of the Directorate for Financial and Enterprise Affairs at the OECD.
He’s currently in Melbourne for the APAC Blockchain Conference, so I gave him a call to find out more about his keynote presentation, “Unleashing the potential of blockchain”.
Greg, I guess since cryptocurrencies are all global in their character, the best regulation would be global rather than each country doing its own thing, but do you think that’s even possible at the G20 level to have global regulations about cryptocurrencies?
Well I think what you need is global policies that can guide governments and then obviously governments can take those global policies and turn them into regulation. That’s the way you try and get a global approach and that’s why OECD or if you want other international organisations are very important to look to set some policy standards that then can help governments put in place appropriate regulatory frameworks but equally what’s really important, I think, is industry standards are just as important to lead the way and actually help shape government policy. We need both to be efficient.
You’re off to Buenos Aires for a G20 meeting on Finance. What sort of discussion is taking place about these matters at G20?
I think with ICOs, clearly 12 months ago ICOs were regarded as sort of too small to really care, whereas now 12 months later when I think there was 6-7 billion issued in the last 12 months, they’ve become too big to ignore and clearly the German and the French governments have called on the G20 to really put in place an appropriate framework and I think Christine Lagarde from IMF has also called for a discussion about appropriate regulatory framework. I think what’s going to be talked about is clearly what are the issues and what needs to be done.
I think with ICOs it’s pretty clear that where it is effectively a security, then we need to apply the sort of principles that are normally applied in securities regulation that deal with how you regulate markets and how you regulate the issuance of securities. Then it needs to be thought about how you would actually tailor it for ICOs, which are different to a normal security. But frankly, they are in most cases securities, particularly if you look at the three categories of crypto assets, payment, tokens, asset tokens or utility tokens. Asset tokens obviously are securities offerings.
You were pretty forward looking when you were running ASIC in Australia, you were on the front foot with these things and you kind of brought in some guidelines around how to deal with cryptocurrencies and the various tokens that you talk about. What sort of message are you then taking from that, the lessons you had then and the thinking that you brought to it at ASIC to the OECD, what are you saying to people about what should be done?
I’ve actually said that you’ve got to be as proactive and forward looking and rather than waiting until a problem occurs we should be thinking about working with industry now to develop global policy standards that can help guide governments because we constantly are getting requests from governments because what OECD does is advise governments in over 100 jurisdictions and they are looking for consistent standards of how they approach setting regulation, from whether it’s blockchain or ICOs frankly.
Just like here in Australia, I said, “If you’re going to be good at this you’ve got to be proactive and forward looking and also you’ve got to understand it before you do something about it.” It actually means a lot of education of regulators to make sure they understand what this is all about. Simply in some countries just banning things is not a great particularly great outcome, frankly. I think you’ve got to shape it.
Which of the cryptocurrencies is a security already and therefore covered by existing securities laws, and which of them are not and need new regulations around them?
Well, if somebody is buying an initial coin offering, let’s face it, Bitcoin is not a coin and an initial coin offering is not a coin. If somebody is buying it with an expectation they increase in value, it is probably a security, okay? That defines a security and therefore it should be covered under securities laws, it’s just as simple as that.
That should then cover all of them. Bitcoin is therefore a security and basically they’re all securities. Everyone’s buying them in the expectation that they’ll go up.
No, because actually with a payment token – I could classify bitcoin as a payment token as opposed to an asset – the key issue for that is it’s not actually offering a particular service, it’s actually just providing a method of payment. People may not necessarily be buying it. Yes, there’s an argument they may be buying it for speculative reasons, but if it is a payment token they’re actually using it as a form of payment. The key thing there that’s required is making sure that you’ve got appropriate KYC and anti-money laundering requirements on the payment token. That’s the key thing for a payment token, whereas an asset token is really something that actually is offering to provide either a share of profit or some sort of service. That is basically a business and that is why it’s a securities offering.
For things like bitcoin and other payment tokens, do they need a whole new system of regulation created or can it be caught by existing money laundering and know your customer regulations?
I think the key thing with payment tokens, because they’re payment tokens, is to be covered by AML and KYC, that’s the most important thing actually. The biggest issue with Bitcoin is its lack of traceability and that just is not going to be tolerated for much longer. It’s one of those cases where, when it was too small to worry about it wasn’t a problem, but now it’s become again too big to ignore and you will see, as you have seen in some jurisdictions, they’ve just simply banned it.
I think either Bitcoin itself will need to change to be traceable or there’ll be mechanisms put in place to make sure that between individuals – basically you need to be able to trace it back to an entity or a person that can be identified so they can deal with issues of tax avoidance or organised crime or terrorism funding or whatever. That’s critical, you’ve got to have that.
But that’s why people like Bitcoin and the other things, is because they’re not traceable. I mean, if they become traceable it’s probably not going too far to say that it’s pointless.
Well, actually, no. The beauty of Bitcoin is that between parties it’s anonymous, so that is still attractive. It can remain anonymous between individuals or entities but what’s most important is that authorities still have the ability to trace what’s going on if it’s actually going to bad actors. You’ve just got to have that, frankly.
That is kind of what a lot of people like about it, is because it can’t be traced. They love that!
They may be, but that is not a good purpose for having a digital currency, basically it’s to actually break the law, frankly.
Yeah, fair enough.
That’s why, one of the things from now on that I think you will see evolve very quickly though, that will put pressure anyway on things like Bitcoin, if you think about it the three types of payment tokens or cryptocurrencies – there’s CR digital currencies which are very close, either retail or wholesale. Then you’ve got asset backed cryptocurrencies which are backed actually by currency or commodities like oil. Then you’ve got things like Bitcoin or Ethereum that effectively are not backed by anything that basically relies on the supply and demand algorithm.
I think that actually what I see is emerging is the future probably belongs in more fiat or asset backed cryptocurrencies than what we have today and actually that the fact that they’re traceable. I think these things will accelerate to put pressure on, if you want, the current version of being things like Ether or Bitcoin. I think we’re in an evolving market.
In fact, last September when you were still ASIC Chairman you told a Financial Review Conference – I think it was that – that you thought bank accounts would become unnecessary within the next decade because central banks will create digital currencies and allow customers to hold deposits directly with them. You’ve been talking about that for a little while, that you could see fiat or central bank…
Oh yes, and I think currently there is in government circles a number of papers circulating on…issue digital currencies as we speak and I think it’s already know that Sweden is very close to doing something on retail digital currency, as is China. And in the wholesale system, wholesale payments – already there’s a trail occurring between Canada and Singapore on using a digital token to actually settle payments in the clearing system. That’s in the fiat space and then in the asset backed space UBS actually is developing a token that will be backed by currency lodged at a central bank to actually create a private clearing system between banks. So it’s happening, it’s happening, I wouldn’t say it would happen overnight but certainly that’s the way it’s going.
Greg, explain to us the advantage for a central bank or a government like Sweden or China or someone to have a digital or fiat backed cryptocurrency. Why would they do that?
For three reasons. One, is actually it’s cheaper than issuing money. For the seigniorage it’s extremely efficient. Secondly, it’s fully traceable so basically it enables the tax authorities etcetera, to actually deal with potentially money laundering and tax avoidance. That’s why many governments like the idea of central digital currencies. And thirdly, it creates a revolution in terms of the customers because actually there’s no longer a need for banks to actually, necessarily for you to have a bank account which actually saves in terms of transaction fees, etcetera.
The cost of transacting money is virtually zero, so it produces a lot of efficiencies in the system but also it does produce a lot of competition because suddenly because you don’t have to have a bank account because you’ve got a digital wallet that’s actually just on the central bank, you may decide with your excess cash to decide to either lend money to a bank or to lend money to a money market fund. It puts a lot more competition actually into the retail banking system. But again, you know, it actually saves costs for consumers.
What are we talking about actually. In relation to say, Sweden, are we talking about them having the Krona on blockchain, is that what we’re talking about?
It may not be blockchain, it could be some other technology, but a digital Krona is what – Sweden is already largely a digitised economy, you can hardly use cash in Sweden, you probably know that, right? So this step for them to go to issue a digital Krona is not that big of a leap given that currency is hardly used much at all already in Sweden and actually it doesn’t mean to say they would eliminate currency, but they would just provide the option I expect.
I was going to say, Greg, that I mean I don’t carry cash at all now. As far as I’m concerned, the Australian Dollar is digital.
Yeah, except that you’ve got something called the bank that sits between you and the central bank today, right?
Right, so that’s what you’re talking about, the disintermediation of banks so that the currency that I hold, if it’s a digital currency, there isn’t a bank?
If you think about it, the traditional role of banks in currency, the central banks needed – if you think about it in a physical world, the central banks needed banks to distribute physically currency, right? If it’s digital, they don’t actually need the banks to do that anymore, right? Potentially that’s just not required.
But you’d need the bank to hold the money for you, wouldn’t you? Or not?
Why? If you’ve got a digital wallet that’s actually with the central bank, why would you need that? You could, you might still want them to have a custody account, you might want to do that, yes, that’s true. But then you may say, “I’m fine for my credentials to actually just – I’ll hold my credentials myself.” But no, you’re right, there’s an opportunity for banks to become custodians of digital wallets. Yes, I think many people have talked about that as a new role but that may not necessarily need to be a bank to be a custodian, it could be some other party.
In fact, it’s quite interesting for banks because it probably is good for banks in the longer term because it means there’s no necessary need to hold capital. They’d need to hold operational risk capital but they wouldn’t actually have to hold credit capital against it because that would be just a custodian. So, to a certain extent it possibly makes it a lot better for banks because they’re not actually holding deposits, right? They’re actually just custodians of digital wallets or the digital currency. On this issue, one central bank has said to me, a very major jurisdiction has said to me, “Well, if I’m willing to issue somebody with a bearer note, why wouldn’t I be willing to issue them a digital wallet?” It’s a very good point, actually, very good point.
It’s true, but banks need to take deposits in order to make loans, that’s their whole business, isn’t it?
No. Banks need to raise money to make loans, so rather than the bank taking a deposit, they would actually borrow money from people, which is what they do today. They still take money, you’ve still got the credit creation. It just changes the nature of the relationship. It means that a consumer with their digital wallet can decide to transfer money to a bank and can lend that money or they may equally decide to put it into a fund, a cash management account which in turn may lend money or whatever. You still have credit creation but actually the starting point is different, that’s all.
That’s so interesting. I mean, what you’re talking about is a revolution really. I mean, a totally different way of running the financial and monetary system.
Yes. But you know what is interesting, Alan, from a monetary system perspective, the thing that’s really interesting, one of the FSB discussions, the other beauty for monetary policy with a centrally banked digitally issued currency is you can actually see the true payment flows. You can see exactly where money’s being spent in the economy, so it gives central banks far greater insight into actually where money flows are actually occurring because you’re actually seeing the flows. So it becomes quite interesting in terms of monetary policy, frankly.
Well, I was going to say, what implications are there for monetary policy of the system you’re talking about?
Far more efficient monetary policy because you’re no longer estimating where money is flowing, you can actually tell where it’s flowing. You actually know exactly where in the system money is actually flowing. In terms of the way you set interest rates etcetera, it makes it much more informed, right? Because at the moment the whole process is estimates, right? Whereas, with centrally banked digital issued currencies you actually see the account for the whole economy. It basically lets you see the flows, right? The setting of interest rates still becomes – you know, you can set them but you’re much more informed.
It’s interesting because the traditional role of a commercial bank is to, in a sense, act as the money creation arm of the central bank. They actually do the money creation for the central bank, don’t they? But you’re talking about a world in which that doesn’t happen anymore.
Sorry, they would still do that, that’s the point, they would still be doing exactly that, but they wouldn’t be doing it as deposit takers, they’d do it as borrowers, okay? It’s the same thing, the money is still flowing out of my digital wallet, I’m still making a deposit with the bank. I’m not doing it, if you want, in an inertia form because they’re holding my money. I’m actually choosing to deposit with them because I don’t need to have a deposit account. I don’t need a transaction account with them anymore, okay? What it means is the traditional hold the banks have over individual’s finances is broken, so all the inertia money disappears, if you like, right? Because basically it’s sitting in a wallet.
The interesting thing is I think it puts a lot of pressure on banks in terms of competition for money because I think what you’ll have is it opens up probably more opportunity for non-banks to compete for deposits, okay? Because actually people no longer – their money is no longer necessarily by inertia sitting in a transaction bank account.
I presume for this to occur there has to be some kind of regulatory or legislative big bang. Is that what Sweden’s looking at, that to bring it about you can’t just…?
I don’t think so. I don’t think it’s a big bang. It would basically if somebody wants to go to the central bank and say, “Look, rather than having this million dollars in cash, can I just get it as a crypto, as an asset wallet?” and they go, “Yeah, sure, here you go, here’s your hash code…” or whatever it is. Fine. I think this is evolution, not revolution, frankly. But the thing about it is that I think once it occurs and I think the benefit of it for consumers is incredibly powerful – like, can you imagine no more credit card fees, no more transaction fees, etcetera, etcetera…? It becomes pretty attractive to individuals, right? Also, no counterparty risk to banks, right? I don’t have to worry about counterparty risk, my exposure is to the central bank.
That was Greg Medcraft, Director of the OECD Directorate for Financial and Enterprise Affairs.