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10 Reasons Why Central Banks Will Miss The Cryptocurrency Renaissance

August 20, 2017 Tyler Durden 0

Authored by Eugene Etsebeth via CoinDesk.com,

Eugéne Etsebeth is an ex-central banker who was employed as a technologist at the South African Reserve Bank from 2013 to 2017. During his time at the reserve bank, he notably chaired the virtual currency and distributed ledger working group.

 

In this opinion piece, Etsebeth outlines why he believes central banks won’t be able to adapt to innovations in cryptocurrency, arguing they simply aren’t set up to compete with sea changes in technology.

It’s a familiar trend, one that happened in communications (internet), and that is now playing out in energy (solar), manufacturing (3D printing) and finance (cryptocurrency) – power and control are moving into the hands of the individual and away from nation states.

This has huge implications for central banks, which today enable nation states to maintain their monopolies over the issuance of notes, coins and sovereign bonds. While communications and manufacturing are not their focus, cryptocurrencies and initial coin offerings (ICOs) fall predominantly in the realm of central banks.

In these systems, central banks don’t issue legal tender. Rather, miners and algorithms now control the issuance of tokens – effectively, the money supply. Whereas previously banks were licensed to store, send and spend currency, now wallet providers and exchanges allow the same features.

The currency renaissance has arrived and central banks are studying cryptocurrencies, though some central banks are more open to change than others.

Singapore has been investigating the notion of using distributed ledger technologies to settle cross-border transactions in real time, and the Bank of England has experimented with Ripple. Central banks are even looking to build their own versions of central bank-issued digital currency (CBDC).

Even still, central banks are not well equipped to deal with the cryptocurrency renaissance.

In fact, there are 10 good reasons why most central banks will find cryptocurrencies insurmountable. Sure, a small number of forward-thinking (and acting) central banks will maintain monetary competiveness with the burgeoning cryptocurrencies and ICOs that have reared their decentralized heads.

Still, most will succumb to a mix of the following issues:

1. Workforce of the past

Central banks will need to attract and retain fresh talent that will enable them to deal with the new openness and transparency demands, as well as digital transformation and the increasingly complex global world.

2. Slow decision-making

Decision-making in central banks is like wading through treacle – decisions take months because of numerous layers of hierarchy.

Working groups need to compile voluminous and detailed documents that need to be reviewed and signed by all parties before they can proceed to the heads of departments or the deputy governors.

3. Too few technologists and innovators

Academics, economists and big-picture thinkers excel in central banks. The academics ponder on conceptual issues and the economists make interpretations from data, whereas the policy makers and regulators mull over the cause and effect of promulgating laws.

However, technologists are generally not part of the discussion when it comes to policy and economic decisions for currency.

4. Fear of experimentation

Although some central banks are engaging in experimentation, there is a fear of going from proof-of-concept to pilot phase.

This is natural, should a central bank make an error, it may turn out to be a reputation buster – and reputation is the cornerstone of central banks. There is also some trepidation that the early regulation of cryptocurrencies, and associated new technologies, may legitimize their adoption.

5. Territorial and siloed thinking

Central banks are similar to conglomerates in that they have a number of different and distinct departments that require diverse skills and outputs.

These differences make it difficult to approach a new technology and economic tour de force like cryptocurrency, because it doesn’t fit neatly into any one of the industrial-style conglomerate domains.

To highlight the conglomerate type nature of central banks, the core departments and skill sets are listed below:

  • Bank supervision: mainly supervisors and regulators who manage banking licenses and audit
  • Currency management: manufacturing and logistical planners
  • Financial markets: front, middle and back office currency and bond traders
  • National payments: a combination of regulators for payments and technical resources running the RTGS system
  • Research: mainly economists who produce statistics based reports and input into repo-rate decisions.

6. Buy versus build approach

Most central banks do not have substantial software development capability. Therefore any new project will have to buy its technology. There is an acute shortage of central bankers who can explain or use Merkle trees.

7. Stuck in the status quo

A large portion of central bankers are career central bankers, so the desire and ability to change are not incentivised. Change is often considered a threat to staff, and threats are met with jelly-like stickiness to the status quo.

8. Incumbent relationships

Banks are licensed to operate by central banks, giving them the ability to create money from customer deposits.

The central bank asks the banks to protect depositor’s hard-earned money and to serve as many customers as it can: i.e. maximizing financial inclusion. The task of banks is therefore to service a nation’s citizens at the behest of the central bank.

These relationships and licenses are expensive to buy and will not easily be changed to include new members.

9. Inter-governmental coordination

Just as the departments within central banks tend to be siloed, so too are the intergovernmental departments that look at currency matters.

They cover treasury, financial intelligence (KYC), financial services conduct authority, central bank, tax revenue and secret service units. Each of these units may have different acts and regulations that overlap cryptocurrencies and ICOs.

10. International coordination

Internationally the nation-state must get guidance from a multitude of organisations like the G20 or G7, International Monetary Fund (IMF), Bank of International Settlements (BIS), Financial Action Task Force (FATF) and INTERPOL. International coordination often requires prolonged diplomacy and mismatched agendas.

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Deep State and the Path From Fantasy to Meme to Fact (sic)

August 20, 2017 chindit13 0

Horror Vacui. Nature abhors a vacuum. So do humans. Where there is a lack of knowledge, or a lack of answers, humans will make up stuff to fill the void. That might be comforting, but it can be dangerous. It is how superstitions are created, and it also can be the genesis for everything from racism to social division, strife, and violence. It is the sort of thing that gets “witches” burned at the stake.

This place, which is to say the Comments Section, never ceases to amaze! Similar to other Open Comment sites, it tends to gather a specific type of person and then structures itself into a uniform community, with nary a dissonant voice. Years ago Tyler told me that less than 1% of the readership wrote comments. That was back when the site was primarily financial. I don’t know what the percent is today, but I would guess the demo has changed, and many who once came for financial insight now just visit occasionally for a few laughs. So long as there are clicks and eyeballs, it’s all good. The cash register still rings.

I wonder if the vocal membership ever stops to ask themselves why they think what they think, and what has convinced them to believe the most outlandish things? Do they really know what they think they know, or do they just assume a set of beliefs that has some odd internal psychological agenda, but about which they really know absolutely nothing?

Never have so many been so wrong about that which they are so sure. Yes, I’m talking to you with your endless conspiracies and your chemtrails and your Deep State and your debilitating fear of your own shadows—you know, because those shadows just might be CIA-generated ninja assassin 2D holograms armed with mini-HAARP neural disrupters!

I appreciate some of the folks here are batshit crazy—way too many—and that explains their bizarre world view. Sadly, nothing can be done about them. We’ll forever have them with us. I do believe Tyler gets a good chuckle out of the nonsense you guys produce, and he is expert at pushing your panic buttons. Kudos to him for capturing the moonbat demographic and monetizing it. Other folks, however, who may be sane, but who are viewing all sorts of events from outside of the arena, still become cocksure in their views merely because they had a pre-existing belief and searched the internet until they found something that corroborated it. They call that becoming ‘awake’, or ‘taking the red pill’, but to call a spade a spade, it is simply confirmation bias. One belief then becomes the base against which subsequent events are assessed and analyzed. “This one feels like a false flag” is a function of them assuming all of the previous events they believe were false flags actually were, which of course they were not. Foundations get built on quicksand. That is truly an odd thing, seemingly the result of that aforementioned vacuum, plus a sense of personal victimhood and self-esteem issues. It drives people to manufacture answers, and even bad answers are good enough. There isn’t any quality control, because the mental infrastructure that spews out thoughts is flawed.

This wonderful—and often not so wonderful—internet thing has replaced the old neighborhood coffee shop or greasy spoon diner, the place where like-minded people gather to reinforce each other’s beliefs and to find comfort in belonging. It has never been so easy for an individual to find an echo chamber, to feel they are independent free thinkers by becoming part of a flock. Yes, that is a contradiction, but the point is that vacuum filling, and finding a way to salve the pain of victimhood, is the goal. The internet delivers in a way, and to a degree, no coffee shop ever could.

This site is very much that echo chamber, a kind of cyber neighborhood coffee shop. Folks gather, memes are introduced, gnawed on, embraced, and ‘corroborated’ by posting LINKS to websites that ‘make sense’ (but where the original author likely knows absolutely nothing). Soon a sort of circularity or tail-chasing occurs, where LINKS stumble upon themselves so many times, that something someone somewhere pulled straight from his or her backside becomes gospel.

Once the meme morphs into gospel status, believers congratulate themselves on their sophistication and for ‘figuring it out’. Anyone who doubts is either a ‘paid troll’, woefully naïve, or something worse. It doesn’t matter whether the common song in the echo chamber is melodious or not, only that it fills the vacuum and offers solace to the victims of whatever the injustice from which they believe they suffer. Nobody can really imagine what the world would be if all the dragons were slayed, partly because it is far too complicated, and mostly because the majority of the concepts are wrong from the get-go. In any event, it really is all about the journey, not the destination.

There are countless examples of this process, though I will only mention one. Some of the unmentioned have resulted in needless violence born from pure stupidity (Dylann Roof, Edgar Madison Welch), while some have just served to generate lots of self-inflicted pain in the form of anger and bitterness (just scroll any comment section on this site for proof). One wonders if anger and bitterness do not become a need or an addiction. Certainly plenty of people go out of their way to fuel it and nurse it.

My personal favorite fantasy-turned-fact is the term, or entity, “Deep State”. What the hell do people think that means? That there is some constant cadre of self-appointed folks who run the country or the world? THAT is woefully naïve. Painfully naïve, even childish. It is a silly belief fed by a combination of Hollywood, pulp fiction, ignorance, and insanity, and it is about as real as Star Wars or Men in Black (I know, I know—some here will tell me those are actually documentaries—and they can prove it with LINKS).

The good news is that nobody is as clever as he or she would have to be to be able to pull off any of what so many sad souls believe to be true. A world of 210 countries and 7.3 billion individuals simply has too many variables. The bad news is that despite that lack of omnipotent beings, leaders and power brokers are, in a relative sense, still way above the conspiracy junkies.

So here is a quick overview of the actual State, and while it might be deep, lumbering and somewhat opaque, nefarious it is not:

There are three branches of government, as most learned in grammar school Civics Class. No news there. They check and balance each other. They also try to defend their turf, battling each other. Each branch has some turnover—political appointments or elected officials at the highest level, deaths or retirements, and tens of thousands of GS-employees, who spend careers working under many Administrations.

Most appointments last a maximum of eight years, but generally less. (Under Trump, it can be as little as a week—The Mooch).

Legislators can last longer than someone in the Executive Branch, though there are many one or two term Congresspeople.

Judges can hang around a long time, but there are so many courts at various levels that they have their own intramural competition, which explains why there is an appeals process.

Bureaucrats can linger for 20+ years, but most are just that: bureaucrats. They take a paycheck, do some work, and either go shopping on the weekend or binge watch something on Netflix. They worry about their kids’ grades, or try to remember what time they have to pick up little Noah or Amelia from soccer practice.

The elected officials and the appointees are the ones who push policy, not the bureaucrats, because it is the temporary players whose ego is at play, and who think they have all the answers.

Inside the Beltway, in is in, and out is out. One day a person is a Senior Official with access to the deepest intelligence, policy and military secrets of the nation. The next day, the same person is sitting in his or her pajamas on the couch watching the morning shows, completely out of the loop. Once Administrations change, former officials have a limited shelf life—perhaps six months—where they can be guests on panel shows or the Sunday Talk Shows, though a few land a corner office with an IB or hedge fund who wildly overpays and comes to feel Buyer’s Remorse (aka, they get Eric Cantor’d). After that, they become Jeopardy answers—unless they are really engaging guests on TV or write a best seller. The ones who last longest spend their final years as ‘Photo Ops’ or ‘Selfie Targets’. Lots of people want a picture to frame for their office standing, for example, with Henry Kissinger or James Baker. Bill Clinton has now officially entered Selfie Target status, and Hillary will, too, as soon as she comes to terms with her self-inflicted defeat (this writer has his share of such photos…somewhere, in some closet or box).

Outside of actual government officials, there are business leaders and lobbyists who tend to have longer term influence than political appointees, but even their influence is limited both by the tenure of their position as well as the changing landscape of American business. Competition and technological advancement bring new faces to the fore and old faces fade away. For example, one day Harold Geneen (“Not ‘J’ as in ‘Jesus’, but ‘G’ as in ‘God’”) gives way to Lee Iococca, who gives way to Jack Welch, who gives way to Jamie Dimon, who gives way to Mark Zuckerberg. Influence, or ‘Power’ is rather fleeting.

Even fortunes tend to dissipate with time, as neer-do-well kids eat up the corpus, or inflation makes yesterday’s fortune chump change compared to the newest next best thing. Thirty years ago the Bass Brothers were at the top of the Forbes 400. Remember them? Today, the combined Bass fortune is not even a fifth of Jeff Bezos’ wealth. Paul Ryan might tell his secretary to tell a Bass that ‘I’ll call him back”, but he’ll take Jeff Bezos’ call immediately That’s how it works. How about one of the internet’s bigly baddest Bogeymen, the Rockefellers? ZIRP and risk aversion killed that fortune’s clout. No matter how large the fortune, Bezos and Zuckerberg sped past it like Usain Bolt in an Olympic final. How much clout does the Rockefeller Foundation have compared to the Washington Post or Facebook?

The only thing constant in the halls of power is change. Deep State is a wading pool, with a leak, in the middle of a desert. Power lasts only slightly longer than a Higgs Boson.

If Steve Bannon learned anything during his seven months in Trumpistan, it is likely that he learned Deep State is a silly myth. If he still believed in it, he wouldn’t be going to a relatively small internet media site funded by a single man’s fortune. If Deep State was a reality, a David as small as Breitbart wouldn’t dare trying to stand up to the Deep State Goliath. Of course Bannon might still use the term if he thinks doing so will work to his advantage, just as he plays Pied Piper to the more virulent elements of Alt-Right, when in point of fact he considers them clowns.

Reality is likely disappointing to many. Things like Deep State or Secret Cabals provide excuses to people who fail to succeed. For others, such beliefs are just entertainment, and do no harm so long as they are not taken too seriously. For the former group, however, the ones who use such beliefs as excuses, it can be debilitating and lead to a kind of bitterness that never goes away. Every time I visit this website now, and scroll through comments, I see that bitterness. It is wasteful. It foments anger or rage that can’t be doing a body much good. It is also purely self-inflicted.

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Morgan Stanley: Here Comes “The Three-Headed Policy Monster”

August 20, 2017 Tyler Durden 0

One month ago, Morgan Stanley’s chief cross-asset strategist looked at the current state of the market – “the S&P 500, Russell 2000 and NASDAQ have hit all-time highs. Volatility has plunged back down near all-time lows. Credit is tighter and yields have been stable” – and asked “what rattles this market. What breaks the egg?”

His answer was five-fold, including valuations, inflation, geopolitics and China, but the biggest concern was what is coming in just one month on the US legislative docket:

The debt ceiling worries us most, given that action may need to be taken within as little as seven weeks.

It was “seven weeks” four weeks ago, which means that the D(debt)-day for the US government – now expected ti hit in the first days of October – is ever closer, even as the domestic political situation in the U.S. gets progressively worse.

So where are we now?

Predictably, as Sheets writes in today’s latest weekly Sunday Start, “political risk is rising on our list of concerns, after a limited (negative) impact so far this year”, and while the MS strategist is concerned about the UK, he is increasingly more worried about the US: “In the US, it’s the need to pass a budget and increase America’s borrowing authority so the world’s largest economy can pay its bills. The stakes are high; without the ability to issue new debt, our economists expect that the US Treasury’s dwindling cash reserves could be exhausted by mid-October” meanwhile “in the US, Congress will return Labor Day to face what my colleague Michael Zezas calls a “three-headed policy monster”: Raising the debt ceiling, passing a budget and embarking on tax reform. None are easy, but we see the debt ceiling as the most immediate test.

What happens then:

The most likely outcome is that, after some tension, the debt ceiling gets raised. But we don’t think it will be easy, or smooth, and it may require some form of market pressure to get different sides to fall in line. I’ve spoken to investors who are comforted by FOMC transcripts from 2011 that discussed prioritisation of debt payments in order to avoid default. I am not. First, I worry that this reduces the urgency of what remains a serious issue. Second, this prioritisation would require delaying payments to programmes like Social Security and Medicare, with real human and economic cost. And third, while the mechanics of this prioritisation may work, it is untested in a live environment.

In other words, the fact that the Fed has a “backup plan” for the worst case scenario, is precisely why the worst case scenario is now much more likely to happen, something that judging by the growing kink in the T-Bill curve, the market increasingly agrees with, and why the first week of October could be a major shock for risk assets.

 

Furthermore, assuming a best-case outcome, one where a clean bill passes with no problems, there is an additional wrinkle according to MS:

“in the good scenario where the debt ceiling is increased, the Treasury will need to issue a lot of paper to claw back the cash balance that’s been drained during this process. Our US economists think that this could involve US$300-375 billion of T-Bill issuance in 4Q, a level with very limited historical precedent.

While there are various trade ideas associated with that observation, Sheets ends off with a somber, philosophical adieu:

The idea that America’s creditworthiness is beyond reproach is, without exaggeration, the cornerstone of the global fixed income market. We hope that politicians appreciate the seriousness of this issue and put politics aside to resolve it. History is watching.

And on that note, here is Morgan Stanley’s full report:

One-Sided Political Risk

 

We remain constructive. But political risk is rising on our list of concerns, after a limited (negative) impact so far this year. In both the US and UK this risk looks one-sided and negatively skewed over the next month, with the best case being that it may not matter. We’d stress that this is before considering any effect on confidence or policy after a growing number of CEOs and business leaders moved this week to publicly rebuke and distance themselves from the US administration.

 

In a few weeks’ time, politicians will come back from their summer holidays to face serious challenges. In the UK, there will be increased scrutiny of the progress (or lack of) in Brexit negotiations. In the US, it’s the need to pass a budget and increase America’s borrowing authority so the world’s largest economy can pay its bills. The stakes are high; without the ability to issue new debt, our economists expect that the US Treasury’s dwindling cash reserves could be exhausted by mid-October.

 

Simple, one might say. For the UK, negotiations are still in their early stages. For the US, leaders from both parties have stated that they’re committed to raising the debt ceiling. Yet, both of these scenarios face the challenge of ‘campaigning versus governing’. We think this can matter for markets.

 

Let’s start with the UK. The idea of ‘Brexit’ was always loosely defined during the referendum campaign. But now that it’s official policy, a choice needs to be made between ‘soft’ versions that still encourage trade and ‘hard’ versions that curtail immigration sharply. Picking one will invariably disappoint some supporters, while those originally opposed to Brexit will likely remain so.

 

There is little margin for error: the government’s majority is slim, and our economists think the effective deadline for reaching a deal may be as early as October 2018 (considering the time needed for ratification by various EU member states). Having been bullish on GBP earlier this year, our FX strategists would now be sellers, expecting increased press attention on these challenges to impact sentiment. They like being short GBPSEK and GBPEUR.

 

In the US, Congress will return Labor Day to face what my colleague Michael Zezas calls a “three-headed policy monster”: Raising the debt ceiling, passing a budget and embarking on tax reform. None are easy, but we see the debt ceiling as the most immediate test.

 

You may not have realised it, but the US Treasury hit its borrowing limit in March, is unable to issue new net debt, and has been operating by running down its cash balance. Our economists estimate that those reserves will be exhausted by mid-October. Since one doesn’t want to cut this too close, this ‘debt ceiling’ needs to be raised by the end of September.

 

That won’t be easy. A subset of Republicans in the House want to make additional borrowing conditional on spending cuts (an issue they’ve campaigned on). That could be a non-starter for the Senate, where bipartisan support will be needed to reach the 60 votes that this increase needs. The fractious nature of the health care debate likely hasn’t helped the level of trust between the Houses of Congress and the parties within them. And the ability of the White House to whip key votes could be impaired by low approval ratings and the continued fallout from comments related to last weekend’s tragic events in Charlottesville, VA.

 

The most likely outcome is that, after some tension, the debt ceiling gets raised. But we don’t think it will be easy, or smooth, and it may require some form of market pressure to get different sides to fall in line. I’ve spoken to investors who are comforted by FOMC transcripts from 2011 that discussed prioritisation of debt payments in order to avoid default. I am not. First, I worry that this reduces the urgency of what remains a serious issue. Second, this prioritisation would require delaying payments to programmes like Social Security and Medicare, with real human and economic cost. And third, while the mechanics of this prioritisation may work, it is untested in a live environment.

 

There’s one more wrinkle: in the good scenario where the debt ceiling is increased, the Treasury will need to issue a lot of paper to claw back the cash balance that’s been drained during this process. Our US economists think that this could involve US$300-375 billion of T-Bill issuance in 4Q, a level with very limited historical precedent.

 

For investors, our interest rate strategists think that this should make it attractive to position for narrower 2-year swap spreads. If the debt ceiling is resolved, this flood of issuance could lead 2-year notes to underperform the swap. If it isn’t, the same result may be possible if investors temporarily avoid short-dated Treasury securities.

 

The idea that America’s creditworthiness is beyond reproach is, without exaggeration, the cornerstone of the global fixed income market. We hope that politicians appreciate the seriousness of this issue and put politics aside to resolve it. History is watching.

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Republican Senator Warns “Violence Is Coming” If ‘Identity Politics’ Continues

August 20, 2017 Tyler Durden 0

Authored by Mac Slavo via SHTFplan.com,
Republican Senator Ben Sasse from Nebraska feels like there’s most likely more violence coming in the near future.

Following last weekend’s deadly clash between neo-Nazi groups, and left-wing counter…

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Video Emerges Showing Clashes Between Indian, Chinese Soldiers

August 20, 2017 Tyler Durden 0

Late last week, we reported that in the first documented clash between Chinese and Indian soldiers who have been piling up across the border between the two nations over the latest territorial dispute, “Indian and Chinese soldiers were involved in an a…

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