Federal Reserve Governor, Lael Brainard, praised the potential of blockchain technology while tip-toeing around Bitcoin in a recent speech. But did Brainard really ignore the elephant in the room or was her message, in fact, a cryptic rallying cry for the banking industry to unite against this decentralized, peer-to-peer, and open-access monetary system?
Federal Reserve Tip-Toes Around Bitcoin, Lauds Blockchain
On April 14, U.S. Federal Reserve Governor Lael Brainard gave a speech on blockchain (distributed ledger) technology at the Institute of International Finance Blockchain Roundtable in Washington, D.C. The Institute is a global advocacy association for the financial industry, with close to 500 members from 70 countries.
Throughout the speech titled “The Use of Distributed Ledger Technologies in Payment, Clearing, and Settlement,” Brainard highlighted the potential benefits of distributed ledger technologies, which can address “important frictions” and reduce “intermediation steps in the clearing and settlement process.”
Brainard only mentioned Bitcoin three times in the speech (or 3x more than I expected) however, going only so far as saying it “inspired” the creation of distributed ledger technology. “[D]istributed ledger technologies and related protocols […] were inspired originally by Bitcoin, and their potentially important applications to payment, clearing, and settlement in the wholesale markets,” she noted.
Interestingly, while conceding Bitcoin’s decentralized architecture was “originally associated” with circumventing central authority, she noticeably stopped short of admitting the risk to her own centralized institution, i.e. the Fed. In fact, “everything” is at risk of disruption by Bitcoin technology as even Goldman Sachs has recently admitted. Instead, Brainard quickly moved to focus on the topic of “permissioned” blockchains that major global banks — many of whom were sitting in the audience — are currently working on.
For the average person to understand what the Fed Governer actually talked about in her speech, we must first translate the doublespeak into layman’s terms. Let’s jump right into the most revealing quotes from Brainard’s speech…
“At the Federal Reserve, we approach these issues from the perspective of policymakers safeguarding the public interest in safe and sound core banking institutions, financial stability, particularly as it pertains to the wholesale financial markets, and the security and efficiency of the payment system.”
[Note: “public interest” might not be very public here as it is directly linked to the welfare of “financial markets” and “the security of the payment system,” which is arguably the privately-owned Fed itself. One should question just how often these “public interests” align with the public’s at large.]
Translation: We will do everything in our power to make sure nothing threatens our system.
“Today, the possible development and application of distributed ledger technology has raised questions about potentially far reaching changes to multilateral clearinghouses and the roles of financial institutions as intermediaries in trading, clearing, and settlement for their clients.”
Translation: There’s a risk our system could get disrupted by this new technology.
“In the extreme, distributed ledger technologies are seen as enabling a much larger universe of financial actors to transact directly with other financial actors and to exchange assets versus funds virtually instantaneously without the help of intermediaries both within and across borders.”
Translation: Our system could be made obsolete by an alternative, decentralized, peer-to-peer, open-access system.
“Today, many industry participants are experimenting with distributed ledger technology in controlled, permissioned environments. If some of these experiments bear fruit, it will be important to address the challenge of how they would scale and achieve diffusion.”
Translation: If private blockchains work, we would still need to figure out how to keep the public from joining an open-access monetary system such as Bitcoin.
“[D]etermining exactly how the different distributed ledger technologies interoperate with each other, and legacy systems, will be critical.”
Translation: We have to combine our efforts if we want to compete with this new technology.
“Since distributed ledgers often involve shared databases, it will also be important to effectively manage access rights as information flows back and forth through shared systems.”
Translation: Secrecy should be maintained even if we share databases.
Thanks Bitcoin! We’ll Take it from Here
Winding down, Brainard stressed that systems which rely on trust are the cornerstone of the traditional financial system. Once again, “public interest” was directly linked to the welfare of the incumbent financial system, despite the fact that its disruption could bring about a myriad of benefits.
“The daily operation of markets and their clearing and settlement functions are built on trust and confidence.” she explained. “Confidence has built over time that when market participants trade, accurate and timely clearing and settlement will follow. Any disruption to this confidence comes at great cost to market integrity and financial stability. This is a matter of fundamental public interest.”
Whether the public itself — as we understand the term — has “confidence” in the financial system is increasingly becoming a matter of debate, of course. Endless boom-and-bust credit cycles, too-big-too-fail banks, gold/silver price manipulation, and the recent Panama Papers leaks, are just some of the inconvenient truths undermining this talk of “market integrity.”
Moreover, this is precisely where Bitcoin is at odds with the incumbent monetary system since it is trustless. Bitcoin visionary Andreas Antonopoulos, for example, admitted that he would even rename Bitcoin to “TrustNet” if he had the chance since its design eliminates the need to trust financial intermediaries such as the very much opaque Federal Reserve.
Brainard concluded her speech by stressing the need to intervene if any real threat to the current financial system arises. On the other hand, she is open to loosening regulations if this technology proves not to be too disruptive to the status quo.
“Regulators also should seek to analyze the implications of technology developments through constructive and timely engagement,” she stated. “We should be attentive to the potential benefits of these new technologies, and prepared to make the necessary regulatory adjustments if their safety and integrity is proven and their potential benefits found to be in the public interest.”
Do you trust the Fed? Would distributed ledger technology make the financial industry more transparent? Let us know in the comments sections below!
Images courtesy of federalreserve.gov, ponderingprinciples.com