Keynote Speech at Treasury Markets Summit 2018: “Crypto-assets and Money”

Medium of exchange: Money must be generally accepted as a means or instrument 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 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, liabilities, income, expenses, profits and losses, in addition to serving effectively as a store of value and medium of exchange.

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 crypto-currencies 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 so-called “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 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 crypto-currencies 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 hard to envisage how any society could adopt crypto-currencies as a unit of account.

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 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 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 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.

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 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 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 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 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 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, 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.