Norman Chan: Crypto-assets and money
Keynote speech by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority,
at the Treasury Markets Summit 2018 "Crypto-assets and Money", Hong Kong, 21 September
2018.
* * *
Ladies and gentlemen,
1. In the past few years, different forms of "crypto-currencies", notably Bitcoin, have emerged
and become a catchword. Bitcoin is the number 2 trending searches of global news
according to Google Trends. These crypto-assets normally deploy the Distributed Ledger
Technology, or DLT, and have a limited amount of issuance based on "mining" by
participants. These crypto-currencies can be transferred between participants through the
internet without a central clearing agent. There are many trading platforms that allow these
crypto-currencies to be traded. It has been argued by some people that crypto-currencies
would disrupt or at least seriously challenge the traditional fiat money, especially when some
central banks have been issuing enormous amount of fiat money through quantitative
easing. What I'll do today is to discuss this important question: will crypto-currencies
become an alternative form of money in the future?
2. To answer this question, it is necessary to start with the basic issue: what is money? I think
there is little disagreement amongst us that money should have three key attributes or
functions:
Medium of exchange: Money must be generally accepted as a means or instrument
(a)
of payment to facilitate the sale and purchase of goods and services.
Store of value: Money must hold its value over time. For example, precious metals
such as gold and silver have high intrinsic value and they have been used as money
for thousands of years. In modern times, fiat money has no intrinsic value other than
(b) the fact that it is the liability of the issuing central bank. The track record in
maintaining the value, or purchasing power, of the fiat money varies considerably
over time and in different jurisdictions. Moreover, balances in commercial banks are
also widely used as money in modern societies.
Unit of account: This is also an important attribute or function of money. Money must
be accepted as a standard measure of value or price of goods, services, assets,
(c)
liabilities, income, expenses, profits and losses, in addition to serving effectively as a
store of value and medium of exchange.
3. While these three attributes define what money is, I would like to add the concept of
"moneyness" to the formula. This concept is important because over many centuries of
evolution, we have witnessed major shifts in the use of different and new instruments as
"money". In the last century or so, there has been explosive improvement in the ease,
speed, cost and safety of keeping and transferring money. But there is always a question of
relativity. There are many commodities, such as diamonds and gold, that command high
value over time and are readily traded in the open market. These commodities meet partially
the three functions of money, but they score very poorly in the ease and cost of use. As a
result, these commodities have a low degree of "moneyness" and cannot be regarded as
"currencies", other than in exceptional times, such as wars or crises in which the
mainstream "money" is no longer trustworthy or usable.
4. Now let's get back to the theme of my remarks: to what extent crypto-currencies can serve
as money and will they become a credible alternative to traditional forms of money? So it
would be useful to measure them using the benchmarks I have just talked about.
Medium of exchange: Crypto-currencies are not readily accepted as a medium of
exchange. Despite sporadic news that appear from time to time, we have seen no
real evidence that crypto-currencies are widely used as a medium of exchange in the
purchase of goods or services in any meaningful scale. While it is true that
cryptocurrencies such as Bitcoin have attracted many investors and speculators around
the world who own and trade them, it is very different from such crypto-currencies
being accepted as a medium of exchange. As a matter of fact, Bitcoin is a very
inefficient means of payment for several reasons. First, as Bitcoin operates in a
decentralised network, each Bitcoin transaction needs to be validated by the
(a) socalled "miners", who need to solve a complex maths problem using specialised
computers. It takes a lot of time and consumes considerable electricity to complete a
transaction. Currently, the average transaction time is some 20 minutes per
transaction. During periods of high network traffic, the average transaction time can
take anywhere from 30 minutes to many hours. Transaction fee is also high and can
spike up suddenly from time to time. The average fee per transaction in December
2017 was US$34. To put the matter into proper perspective, electronic payments,
using either balances kept by commercial banks at central banks or retail payments
using commercial bank balances, typically take a few seconds and cost a fraction of
the transaction fees in Bitcoin transfers.
Store of value: Crypto-currencies such as Bitcoin have displayed very high volatility in
value. Crypto-currencies have no intrinsic value and are not backed by any institution
or body regarding its value or purchasing power. Their price and thus value are
determined solely by the supply and demand forces prevailing at the time, which can
fluctuate sharply depending on the appetite of the participants. It is true that in some
countries, there has been high volatility in the value or purchasing power of their
(b) money, too. However, one must bear in mind that this kind of volatility normally
happens in times of crisis or in jurisdictions that have rather bad macroeconomic,
fiscal or monetary discipline. But for Bitcoin and most other crypto-currencies, their
volatility seems to be structural in nature and the market dynamics that determine
their price or value is rather opaque and hard to discern. With such high volatility in
value and opaqueness, it poses great risks to the parties in accepting
cryptocurrencies as a store of value or means of exchange for goods and services.
Unit of account: With very high volatility and limited use as a means of payment, it is
(c)
hard to envisage how any society could adopt crypto-currencies as a unit of account.
5. As far as I can see, crypto-currencies are not qualified to become money based on the
analysis mentioned above. It is not a question of time that they can become more widely
accepted as money. Quite the contrary, the design of these crypto-currencies, such as
Bitcoin, is such that the transaction time and costs would go up if more people use or
transfer them. Unlike other forms of electronic money using central bank or commercial
bank balances, crypto-currencies are not scalable, which undermines its prospect of gaining
"moneyness" over time. For this reason, I would like to call these "crypto-currencies" as
crypto-assets for the rest of our discussion as they do not qualify to be called "currencies".
6. Having concluded that crypto-assets do not qualify as money or currencies, let me highlight
a couple of challenges that they present to supervisors and policy makers around the world:
Financial stability risk: The Financial Stability Board (FSB), of which I am a member,
has recently presented its assessment to the G20 Leaders. Basically the FSB
considers that while crypto-assets do not pose a material risk to global financial
stability at this time, given the relatively small size of this market, vigilant monitoring is
necessary in view of the speed of developments and data gaps. The FSB has
(a)
developed a framework, in collaboration with the Committee on Payments and
Market Infrastructures, to monitor the financial stability implications of the
developments in crypto asset markets. Noting that crypto assets raise a host of other
issues that I will explain shortly, the FSB also considers that further international
coordination is warranted.
Illicit activities risk: As many of these crypto-assets are so designed that anonymous
email accounts can be used for trading and transfers without a central clearing
agent, they effectively bypass the existing regime in combatting money laundering,
terrorist financing and other illicit activities. The ease with which crypto-assets can be
transferred across national borders has made it even more attractive to criminals in
laundering their proceeds and income. For the banks and other regulated financial
(b)
institutions, it is proving difficult, if not impossible, for them to comply with the
statutory or supervisory requirements in respect of know-your-customer (KYC) or
ascertaining the source of funds. This was why the HKMA issued a circular in 2014
to banks in Hong Kong advising them to be mindful of the need to comply with all
relevant KYC and anti-money laundering (AML) requirements in their dealings with
crypto-assets.
Investor protection or market integrity: As most of these crypto-assets are traded in
unregulated platforms, usually via the internet, there are significant gaps in data
collection and investor protection. Crypto-asset markets are therefore prone to
(c) market manipulation, such as spoofing or flooding the market with fake orders to trick
others into buying or selling. Moreover, the security or integrity of some of the trading
platforms is also in doubt given the number of cyber incidents that have led to
significant losses of the investors.
7. Having said all the above, I wish to conclude by making the following points:
Crypto-assets are not money or currencies. So people wishing to invest or speculate
in crypto-assets should do so without harbouring the unrealistic expectation that they
(a)
would one day become money or currencies that can be used as a means of
exchange.
Central banks must take extra care in making sure that the issuance of fiat
(b) currencies is managed prudently in order not to diminish the purchasing power of the
currencies or people's confidence in them.
Overseers of payment systems must take proactive steps to ensure that large value
as well as small value retail payment systems, making use of commercial bank or
central bank balances, are efficient, convenient and at low cost to the users. This is
increasingly important as the public now expects and demands a faster and cheaper
means of electronic payment or digital cash, as some would call it, for their day to
day transactions. If the central bank fails to do this, the market will certainly come up
(c)
with some alternatives for this purpose. In this connection, you are no doubt aware
that the HKMA has just launched the Faster Payment System a few days ago. Once
the system goes live on 30 September, people in Hong Kong will be able to enjoy
almost instantaneous P2P payments, making use of either mobile phone number or
email address, free of charge to the users.
While the Distributed Ledger Technology used in crypto-assets creates many
issues, the technology has shown great potential in many other applications. For
example, the HKMA and the banks in Hong Kong will soon launch a digital trade
(d) finance platform using DLT. We are also in the process of developing a DLT
interface that can link the domestic trade finance platform with those of other trading
partners, such as Singapore, on a bilateral basis. This new interface is expected to
be launched sometime next year.
Despite some improvements made in the past few years, cross-border payments,
especially retail or small value, remain inefficient and costly. This is unsatisfactory as
it is not conducive to financial inclusion in relation to remittances by SMEs or
(e) individuals. In this connection, I am pleased to note that progress is being made
recently, as some banks and non-bank e-wallet operators are now developing new
cross-border payment channels, making use of DLT in some instances, that would
result in faster and cheaper services for users.
Like several overseas central banks, the HKMA is studying the technical feasibility
and merit of Central Bank Issued Digital Currency (CBDC). It is still early days, but it
seems CBDC offers greater potential in wholesale than the retail area in terms of
payment and settlement, especially in the cross-border context. However,
(f) considerably more research work is needed to analyse the relative merit of CBDC
over the existing electronic or digital forms of payment in which central bank funds
are used, cleared and settled centrally. It is also necessary to assess the likely
impact CBDC has on the monetary policy transmission mechanism. We will share
with the public the findings of our research work in due course.
8. Ladies and gentlemen, we are now in an exciting era in which FinTech, including DLT, is
advancing in a speed that was unthinkable 10 years ago. All of us, industry practitioners and
regulators alike, must try our best to keep up with the pace or else we risk being left behind.
However, in embracing new technology and innovation, we must also guard against the risk
of overlooking the nature of the financial transactions and the risks that are inherent in these
transactions under the pretext of technological advancement. Crypto-assets are one such
example in which the use of new technology does not alter the nature or risks of the
products or the transactions.
9. I hope you will find my remarks today helpful as an elucidation of the HKMA's stance on
crypto-assets and on digital payments and settlement. One final word of caution though.
Notwithstanding what I have said today about crypto-assets, I won't rule out one day new
technology emerges in such a way that would address the KYC or AML concerns that are
present in the current generation of crypto-assets. We just need to keep an open mind and
stand ready to learn and adapt to new technology and trends. Thank you for your attention.