New Money Review podcast

New Money Review podcast

Plumbing, cryptocurrency and CBDC

April 19, 2021

John Kiff, our guest on the latest New Money Review podcast, has always worked in what he calls the ‘edgy’ areas of finance—from over-the-counter (OTC) derivatives to fintech and digital currencies.

For 25 years, Kiff worked at Canada’s central bank, where he was in charge of managing the country’s foreign reserve risk. He then worked as a senior financial sector expert at the International Monetary Fund (IMF), where he focused on questions of financial stability.

Kiff now publishes a widely followed daily digest of developments in financial technology (fintech) and digital assets.

In the podcast, he tells New Money Review editor Paul Amery that a single theme unites his past and present jobs.

“I’ve been called ‘the plumber’: my interest is in how things work,” says Kiff.

“In the context of derivatives, I was interested in how you do transactions, how you price them and how you manage the risk of them.”

“In the world of central bank digital currency (CBDC), I focus very much on how what design features central banks are playing around with. That’s where my interest lies.”

In a wide-ranging podcast discussion, Kiff explains why the ongoing changes in the structure of the global financial system are important—and suggests which indicators to follow.

Hidden connections and financial crises

“The things that can blow up in your face are often unseen. We missed too much back in 2007. I’m trying to atone for past sins and look for those hidden connections in this [cryptoasset] market.”

Risks in DeFi

“DeFi is definitely a concern to the financial stability and regulatory authorities to the extent that it is purposely designed to operate outside the regulatory sphere. But the major players—the likes of Morgan Stanley and Goldman Sachs—are not involved yet. When they get involved and perhaps take advantage of leverage opportunities, that might put them in danger if something goes off the rails.”

Programmable money

“There are some useful things you can pull out of a smart contract in a CBDC: the distribution of stimulus payments, for example. Smart contracts in the stimulus payments could direct the users to only spend that money at certain places. You couldn’t park the payment in your bank account or use it to buy cryptoassets, for example.”

Interest rates on CBDC

“They could become a tool that enhances the implementation of monetary policy. So far no central banks I know of are talking openly about introducing a CBDC that’s remunerated in any way. But in the case of runaway demand for CBDC, you might want to have the option of calibrating the rate on CBDC to make it less attractive.”

Developing economies’ motivations for introducing CBDC

“Most developing economies are looking at CBDC to save money. They’re hoping they can reduce the amount of cash in circulation. And that goes hand-in-hand with the financial inclusion aspect of CBDC.”

Tether and Diem

“So far, the main use cases for unregulated stablecoins like Tether seem to be inter-exchange and inter-platform flows. So many [crypto] platforms don’t have links to the traditional banking system. In Asia, Tether is also being used to bypass capital and exchange controls. But Facebook’s proposed stablecoin—Diem—would be orders of magnitude bigger than Tether. That’s why [regulators’] focus has been so far mainly on Diem. Overnight, it would be on people’s iPhones and Android phones. That’s what scares the authorities.”

Convergence of traditional finance and cryptocurrency

“We now see big firms like PayPal, Visa and Mastercard saying they’re embracing crypto rather than fighting it. I suspect we’re heading towards a meeting of minds. But it could still be that crypto and blockchain dramatically change the plumbing of the financial system.”

Improving payments and settlements systems

“Blockchain and distributed ledger technology can play a big role in lubricating the payments and settlement systems. But you need to get both the payment rails and the settlement rails operating on blockchain, which means you have to tokenise securities. There are lots of experiments going on in this area. There are gains to be made in terms of both efficiency and safety.”

A level regulatory playing field for traditional finance, crypto and fintech

“Right now, many firms operate outside the regulatory sphere. The challenge for global financial regulators will be in finding ways to bring everybody under the same umbrella. ‘Same risks, same regulations’ should be what we’re aiming for.”