The upcoming shift in leadership atop some of the world’s most important financial institutions is likely to more closely resemble a monetary mandarins’ game of musical chairs rather than a futile rearrangement of the deck chairs aboard the Titanic.

Market chatter this week is suggesting that International Monetary Fund Managing Director and Chairwoman Christine Lagarde could become the next President of the European Central Bank, a position that current ECB President Mario Draghi has held since 2011. Late-week speculation is also running rampant that current Bank of England Governor Carney may be considered to replace Lagarde as Managing Director and Chairman of the International Monetary Fund.  

Draghi’s tenure as President of the ECB concludes at the end of this October and Carney has served as the BoE’s Governor since 2013, after having served as Governor of Bank of Canada since 2008.

Both Lagarde and Carney have not shied away from addressing the topic of cryptocurrencies over the past year.

How might Carney’s potential stewardship of the IMF impact the global cryptocurrency industry, and how could Lagarde’s departure for the ECB impact the industry?

IMF and Blockchain: Regulation at the Fore

In an April 2019 piece about the IMF and World’s Bank’s experiment with blockchain and cryptoassets, I concluded the International Monetary Fund and World Bank would likely be slow and methodical at best in terms of adoption of these newer types of technologies. The launch of “Learning Coin” by the institutions represents their attempt to better comprehend distributed ledger technology. Alas, Learning Coin is an internal training and education tool for the staff of the IMF and World Bank, so it will not be showing up on anytime soon.

Lagarde made some headlines earlier this year when she said the role of “disruptors” using distributed ledger technology is “clearly shaking the system,” adding the markets cannot countenance innovation that would shake the system so much that stability would be lost. She added that technology companies that are “forcefully” entering the banking space must be “held accountable so that they can be fully trusted.” Prior to her remarks, Lagarde had encouraged central banks to examine and evaluate digital currencies to keep pace with the shifting financial landscape.

Carney Sees Crypto as Imperfect but Relevant

Carney has perhaps offered the markets more clues about his views on cryptocurrencies than Lagarde. Given his potential candidacy to head the International Monetary Fund, Carney’s views may be more important at present than Largarde’s views, especially given the fact that Carney also chaired the Financial Stability Board from 2011 through 2018. Also, a Lagarde-led European Central Bank may not wade too often into troubled cryptocurrency waters, as financial policymaking regarding digital assets would likely be undertaken by national financial regulators across the European Union, rather than at the level of the European Central Bank.

In a speech called “The Future of Money” given remotely in March 2018 to the Scottish Economics Conference at Edinburgh University, Carney characterised money as a “social convention” and pushed back against the view that paper money represents “archaic vestiges of an older centralized order of payments that will soon be swept aside by a digital, distributed future.” 

Carney concluded that cryptocurrencies’ ability to act as money is limited at best, and concluded they “are failing” as stores of value and media of exchange. He also suggested that “…recreating a virtual global gold standard would be a criminal act of monetary amnesia” and added the prices of many cryptocurrencies may have exhibited the “classic hallmarks” of bubbles including “new paradigm justification, broadening retail enthusiasm, and extrapolative price expectations reliant in part on finding the greater fool.”

Championing Crypto Regulation

Notwithstanding some of Carney’s observations on cryptocurrencies, he cautioned authorities against stifling innovations that could improve financial stability or lead to innovative and efficient reliable payment services, and concluded that cryptoassets do not appear to pose material risks to financial stability at the present time. Carney also championed the regulation of elements of cryptocurrencies to combat illicit activities, promote market integrity, and protect the safety of the financial system.

Carney concluded his remarks by stating that policymakers need to consider how cryptocurrencies are enabling societies’ preferences for decentralized, peer-to-peer transactions; how cryptocurrencies are enabling the efficiency and flexibility of payments; and whether monetary authorities should issue central bank digital currencies (CBDC).

The BoE Governor cited the daily settling of more than ₤600 billion of payments via the Real Time Gross Settlement System (RTGS) as a settlement risk-eliminating solution that could support innovation such as a more widespread adoption of electronic money. 

Light at the End of the Libra Tunnel?

Carney’s position on cryptocurrencies, however, appears to be evolving. In his final annual Mansion House speech before concluding his governorship of BoE, Carney said the central bank is examining how to authorise digital companies to access the central bank’s payment system and even maintain overnight funds deposited at the central bank. He cited Facebook’s proposal to create a Libra digital currency as one that will face tough regulation including prudential regulation and consumer oversight but added the “very nature of commerce is changing” in such a way that the financial system needs to evolve.  

Carney added Bank of England is keeping an “open mind but not an open door” regarding Libra, but noted the central bank is likely to be the first central bank to avail access to its balance sheet to new payments providers including firms and users of payment services. He argued such as move would help “improve the transmission of monetary policy and increase competition.” Notably, in 2018 the Bank of England became the first Group of Seven (G-7) central bank to open up access to its RTGS to non-bank financial institutions.

Brexit Irony

There is some crazy Brexit irony that Lagarde – as Draghi’s possible successor – could see her first day on the job be 1 November 2019, one day after the United Kingdom is due to leave the European Union. 

As France’s finance minister during the global financial crisis and later the head of the IMF during its bailouts of Greece and Argentina, Lagarde is well-positioned to address another crisis should one emerge, even if she lacks the standard central banking credentials that other ECB President candidates including Bank of Finland Governor Erkki Liikanen possess. 

Crypto’s Day in Court

The cryptocurrency industry should not expect a Carney-led IMF to promote anything closely resembling “regulation-lite” if he assumes the helm, but his recent communications to the markets will have served participants well if they adjust their activities to reflect an industry that is likely to face more scrutiny and additional regulatory requirements. On the positive side, to the extent that Carney’s voice remains material in international policymaking circles, those propositions are much more favourable than the industry death sentences suggested by other policymakers across the globe.

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