Central banks say no to anonymous CBDCs, U.S. slams Iran’s financial sector, EU moves on Russia and Belarus, plus China’s unpopularity and more
I’ve been writing this newsletter for just over a month and I’m almost at 100 subscribers. Help me reach that milestone by forwarding this to a friend or tweeting about it by clicking here. On tap this week:
- Central banks say no to anonymous CBDCs
- U.S. sanctions the rest of Iran’s financial sector
- Reflecting on U.S. financial power
- EU sanctions on Russia over Navalny poisoning plus Belarus update
- Global survey finds China is very unpopular
- Nagorno-Karabakh conflict is simmering
Let’s get straight to it.
Central banks say no to anonymous CBDCs
On Friday, the Bank of International Settlements and a group of seven central banks, including the Federal Reserve, issued a report “identifying the foundational principles necessary for any publicly available CBDCs.” Like other similar central bank papers we’ve seen lately, the message seems to be, “we’re not saying we’re going to issue a CBDC, but if we did issue one, here’s what it would look like.” And like other similar central bank papers, it rules out anonymity with little explanation.
A key feature of cash is that no centralised records of holdings or transactions exist. Some have argued that the main benefit a CBDC could bring would be some level of anonymity for electronic payments (Bech and Garratt (2017)).
Full anonymity is not plausible. While anti-money laundering and combating the financing of terrorism (AML/CFT) requirements are not a core central bank objective and will not be the primary motivation to issue a CBDC, central banks are expected to design CBDCs that conform to these requirements (along with any other regulatory expectations or disclosure laws).
For a CBDC and its system, payments data will exist, and a key national policy question will be deciding who can access which parts of it and under what circumstances. Striking this balance between public privacy (especially as data protection legislation continues to evolve) and reducing illegal activity will require strong coordination with relevant domestic government agencies (eg tax authorities).
What strikes me about this is that the authors recognize the importance of privacy in payments. Who will be able to access payments data and in what circumstances, they say, is “a key national policy question,” presumably to be decided with input from democratically representative institutions. And yet, they seem to simply decree on the more important threshold question of whether a CBDC should be anonymous or not, whether payments data will exist or not.
Like similar bank papers, the authors take it for granted that central banks have some kind of obligation to conform to AML/CFT requirements. They’re vague about this, though. The tell is the passive voice they employ: “central banks are expected to design CBDCs that conform to these requirements[.]” Expected by whom? Under what authority? As I’ve previously pointed out in this newsletter, central banks are not subject to financial surveillance requirements. That should be clear from the fact that central banks are the issuers of trillions of dollars of anonymous notes and coins presently in circulation. A CBDC can be designed to facilitate mass surveillance, but there is no law that I’m aware of (certainly not in the U.S.) that requires that it be so designed.
One other thing I’ll highlight is their formulation that “full anonymity is not plausible.” What does “full” anonymity mean? Anonymity is binary, you have it or you don’t. The authors seem to understand this because they draw a distinction between cash (for which “no centralised records of holdings or transactions exist”) and their notional CBDC system (for which “payments data will exist”). Either centralized balance and transactions data exists or it does not; either it’s anonymous or not. I’m not aware of any middle way.
And here’s the thing: Without anonymity, what’s the point of a CBDC?
The most common justification, including in the latest report, is the decline in cash payments, which started well before Covid-19. The Riksbank’s haste to develop an e-krona has been fueled by Sweden becoming an almost cashless society. But this doesn’t add up: If the shift to digital payments required digital currencies, why is it already happening via cards and mobile applications?
Policy makers have an abstract desire to broaden access to public money, but it is unclear why the “unbanked” would find e-money easier to use than a prepaid debit card.
The only real justification for digital currencies is privacy. But central banks don’t want too much privacy, either, given officials’ desire to increase know-your-customer and anti-money-laundering checks.
Without anonymity, what does a CBDC offer that an already existing private alternative doesn’t?
U.S. sanctions the rest of Iran’s financial sector
The U.S. is looking to deal Iran a knockout blow with new sanctions that finally block all of that country’s financial sector.
Under the measures, announced Thursday by the Treasury Department, the administration blacklisted 18 banks in Iran that have so far escaped some U.S. restrictions, using authorities designed to punish entities associated with terrorism, ballistic-missile development and human-rights abuses. The Iranian financial sector was also designated as off-limits under an executive order that President Donald Trump signed in January.
The move all but severs Iran from the global financial system, slashing the few remaining legal links it has and making it more dependent on informal or illicit trade. The country’s economy has already been crushed by the loss of oil sales and most other trade thanks to existing American restrictions imposed after Trump quit the 2015 Iran nuclear deal.
Europe is not happy about this. Despite exemptions for humanitarian goods, they fear banks will simply ‘derisk’ the whole country.
The Treasury Department said in a statement the prohibitions did not apply to transactions to sell agricultural commodities, food, medicine or medical devices to Iran, saying it understood the Iranian people’s need for humanitarian goods.
However, analysts said the secondary sanctions may further deter European and other foreign banks from working with Iran, even for permitted humanitarian transactions.
“It’s like a punch in the face to the Europeans, who have gone out of their way to indicate to the Americans that they view it as being extremely threatening to humanitarian assistance or humanitarian trade going to Iran,” said Elizabeth Rosenberg of the Center for a New American Security think tank.
It will be interesting to see what happens under a new administration.
Reflecting on U.S. financial power
This is a good point at which to highlight three thought-provoking articles published over the last week on the subject of the U.S.’s financial hegemony.
[A]re economic sanctions actually achieving U.S. foreign policy goals, or simply hurting the U.S. economy?
Unfortunately, even if that question were put to policymakers, they could not answer it. They are not required to assess the economic impact of sanctions on the United States, and they do not articulate clear political goals for the sanctions they propose, provide any measurement of whether they have achieved those goals, or lift sanctions that fail the test.
It takes visible domestic damage to get the government’s attention, like when aluminum prices spiked after a Russian firm was targeted. Since costs to the home front are not a primary concern, there is no government-wide review of policy achievements, so sanctions are rarely lifted and can continue injuring U.S. interests for decades. This approach offers zero incentive to consider alternatives to sanctions and contributes to their overuse.
I imagine that even folks who value U.S. sanctions power generally and support specific sanctions will agree that altogether U.S. sanctions probably don’t pass a cost-benefit test, and that policymakers have little incentive to do one. The article’s solution (appointing a cost-benefit tsar to do the math on sanctions) seems quixotic, though, not least because the cost that matters is systemic and not particular to any specific sanction. And speaking of calculating costs:
the economic dominance of the dollar is not necessarily a “privilege.” Rather, it is an “exorbitant burden” upon the United States economy. The contemporary international financial system’s reliance on a single national currency as a medium of international exchange, payment, and store of value is profoundly unbalanced and inherently unstable, and it would be in the interest of every country to replace it with a better alternative.
In an ideal world economy, there are no current account deficits . If a particular country runs a current account deficit with another state, exchange rate mechanisms should restore the system to equilibrium. However, because the U.S. dollar is the most desirable currency in the world, foreign governments and central banks accumulate dollar-denominated financial assets as a form of reserves and to trade with other countries. This is how an increase in foreign capital inflows enhances the international role of the dollar. Excessive demand pushes the dollar towards overvaluation, reduces the trade competitiveness of American exporters on the world stage, and leads to the loss of jobs by increasing the trade deficit.
Thus, while the U.S. dollar’s dominance harms the U.S. economy and fuels social division and political polarization, it is the bulwark of the U.S.-centered world order. Washington has been propping up the dollar’s hegemony primarily for geopolitical reasons—but only by voluntarily giving up the dollar’s primacy can America overcome its domestic challenges.
At its core, the primacy of the dollar poses a dilemma for the United States—Washington has to balance its domestic and foreign policy interests. It is impossible to tackle the adverse economic effects of the dollar without significantly diminishing America’s global influence. Limiting the dollar’s global role may accelerate America’s disentanglement from international affairs.
Can’t say I agree with everything, but it is certainly worth contemplating.
And if you can read only one thing this week, make it this tour de force by Michael Beckley. On this one I can say I do agree with almost everything:
Many experts bemoan the damage Trump’s “America first” policy has done to the so-called liberal international order—the set of institutions and norms that have governed world politics since the end of World War II. They hope that once Trump has left the Oval Office, the United States will resume its role as leader of a liberalizing world.
Don’t count on it. The era of liberal U.S. hegemony is an artifact of the Cold War’s immediate afterglow. Trump’s transactional approach to foreign policy, by contrast, has been the norm for most of U.S. history.
By 2040, the United States will be the only country with a large, growing market and the fiscal capacity to sustain a global military presence. Meanwhile, new technologies will reduce U.S. dependence on foreign labor and resources and will equip the U.S. military with new tools to contain the territorial expansion of the country’s great-power rivals. As long as the United States does not squander those advantages, it will remain the world’s dominant economic and military power.
Remaining the most powerful country, however, is not the same thing as remaining the guarantor of a liberal international order. Somewhat paradoxically, the same trends that will reinforce U.S. economic and military might will also make it harder to play that role
Among the world’s 20 largest economies, only Australia, Canada, and the United States will have growing populations of adults aged 20 to 49 throughout the next 50 years. The other large economies will suffer, on average, a 16 percent decline in that critical age group, with most of the demographic decline concentrated among the world’s most powerful economic players. China, for example, will lose 225 million young workers and consumers aged 20 to 49, a whopping 36 percent of its current total. Japan’s population of 20- to 49-year-olds will shrink by 42 percent, Russia’s by 23 percent, and Germany’s by 17 percent. India’s will grow until 2040 and then decline rapidly. Meanwhile, the United States’ will expand by ten percent
Faced with flailing allies and a divided and apathetic public, the United States might start acting less like the head of a grand coalition and more like a rogue superpower—an economic and military colossus lacking moral commitments, neither isolationist nor internationalist, but aggressive, heavily armed, and entirely out for itself.
🇺🇸 🧨 🇺🇸 💯
EU sanction on Russia over Navalny poisoning gaining steam
The results are in and shock of shock, it looks like the Russians did poison Alexei Navalny with a banned nerve agent. It looks like Europe may actually do something about it.
European Union foreign ministers backed a Franco-German plan on Monday to impose sanctions on Russians suspected of poisoning Kremlin critic Alexei Navalny with a nerve agent, diplomats said.
Berlin and Paris made their proposal at a meeting of EU foreign ministers in Luxembourg. They say they have not had a credible explanation from Moscow for what the Organization for the Prohibition of Chemical Weapons (OPCW) said was the presence of the banned Soviet-era nerve agent Novichok in Navalny’s body .
“France and Germany propose imposing sanctions on certain people that caught our eye in this respect,” [German Foreign Minister Heiko] Maas said, without giving details.
Diplomats say the two countries plan to propose sanctions on several Russian GRU military intelligence officials.
The speed with which Europe’s two main powers have agreed to push ahead with sanctions suggested a hardening of the bloc’s diplomacy towards Moscow. It contrasts to 2018, when it took almost a year for the EU to agree on sanctions against Russians following a nerve agent attack on a Russian spy in Britain .
But don’t forget sanctions on Belarus were nearly derailed by Cyprus not a week ago.
Browder says the EU’s ability to act is hampered because foreign policy requires unanimity from all members – giving each state a veto. “There’s always somebody there who wants to do Putin a favor, and because of that, the EU effectively can't act.”
Germany has been accused of undermining sanctions against Moscow, as it continues to press ahead with the construction of the Nord Stream 2 gas pipeline from Russia to its northern shores. Critics, including Washington, say the pipeline will simply enrich the Kremlin.
As I’ve said before, it seems to me the Germans want to make this an EU issue as quickly as possible so it doesn’t become about Nord Stream 2.
German officials said possible sanctions, which could involve travel bans and asset freezes, would be discussed by EU foreign ministers in Luxembourg on Monday. But they made clear they would not include any move to stop Nord Stream 2, the contentious pipeline that will bring Russian gas to Germany under the Baltic Sea.
Berlin has long warned of a strong European response to the Navalny incident. But it has also sought to shield Nord Stream 2, saying a moratorium on construction of the pipeline, which involves a clutch of European energy companies, would not be an “appropriate” reaction.
Yet the case has deepened divisions in the EU between opponents and supporters of the gas project. Some, such as the Baltic states and Poland, have seized on the attack on Mr Navalny to call for a tougher approach to Russian energy imports, while others, fearing the economic impact, are more wary.
On Wednesday Poland’s competition watchdog fined Russia’s state-controlled gas giant Gazprom 29bn zlotys ($7.6bn) for pressing on with the construction of the Nord Stream 2 pipeline without securing its approval.
As you can imagine, Russia is not happy about this.
The EU is also getting tougher on Belarus apparently.
European Union foreign ministers agreed on Monday to impose sanctions on President Aleksandr G. Lukashenko of Belarus, widely seen as having stolen the recent election — but they also appeared to offer him a way out of the penalties.
The proposed sanctions must first go through legal vetting and may not be implemented if Mr. Lukashenko engages in serious talks with the opposition about new elections and eases a crackdown against protesters.
Once the legal work is done, the ministers will have to approve the implementation of any new sanctions, which they are trying to use as a means to pressure Mr. Lukashenko. He has been under E.U. sanctions in the past, but they were lifted in 2016 when he eased up on the opposition and released some critics from prison.
Mr. Lukashenko is already under sanctions from the United States and Britain, as well as from the Baltic nations. In response, Belarus has expelled several ambassadors of E.U. member states.
In last week’s missive I wondered why the U.S. didn’t join Canada and the U.K. with sanctions sooner. Well, here’s the answer…
The United States wants to see leadership from Europe in relation to issues like Belarus, rather than relying on the U.S. to move first with sanctions, British foreign minister Dominic Raab said on Tuesday.
Days later, the United States followed with their own sanctions having waited for the European Union to move.
“I think there’s a feeling … that the Europeans will put out the communique, possibly even do some censure, but will pick fights on their doorstep that the U.S. has to ride in to resolve,” Raab told a parliamentary committee, referring to a recent trip to meet politicians in Washington.
“I think they want to see some leadership from Europe, so we tried to provide that with our Canadian friends and with the EU.”
It’s not going to be pretty when the U.S. completely disengages.
Global survey finds China is very unpopular
If China thought it could use the pandemic as an opportunity to burnish soft power, it has failed miserably.
Views of China have grown more negative in recent years across many advanced economies, and unfavorable opinion has soared over the past year, a new 14-country Pew Research Center survey shows. Today, a majority in each of the surveyed countries has an unfavorable opinion of China. And in Australia, the United Kingdom, Germany, the Netherlands, Sweden, the United States, South Korea, Spain and Canada, negative views have reached their highest points since the Center began polling on this topic more than a decade ago.
Across the 14 countries surveyed, a median of 78% say they have no confidence in Chinese President Xi to do the right thing when it comes to international affairs, with at least seven-in-ten in every country saying they lack confidence in Xi. Only a median of 19% express any trust.
Confidence in Xi is low among men and women, those with higher and lower levels of education, across age groups and among those with higher and lower incomes.
Here’s the kind of thing this trend will lead to:
“My instinct is to separate sport from diplomacy and politics but there comes a point where that may not be possible,” Raab said when pressed by a panel of lawmakers in London on Tuesday. “Let’s consider in the round what further action we need to take.”
Expect more of that.
Nagorno-Karabakh conflict is simmering
France, the United States and Russia will step up efforts to end fighting between Azeri and ethnic Armenian forces in the South Caucasus by holding talks in Geneva on Thursday, as fears of a regional war grow.
French Foreign Minister Jean-Yves Le Drian said Russian, French and U.S. representatives would also meet in Moscow on Monday to look at ways to persuade the warring sides to negotiate a ceasefire.
Le Drian did not make clear whether any Armenian and Azeri representatives would attend but Azerbaijan said its foreign minister, Jeyhun Bayramov, would visit Geneva on Thursday.
The Armenian foreign ministry said Foreign Minister Zohrab Mnatsakanyan would visit Moscow on Monday but gave no details. It ruled out a meeting with Bayramov.
Iran, which borders both Armenia and Azerbaijan, has been talking to both the former Soviet republics as concern mounts that Turkey, a close ally of Azerbaijan, and Russia, which has a defence pact with Armenia, could be sucked into the conflict.
While not yet boiling over, it’s starting to have repercussions for Turkey:
Canadian Foreign Minister Francois-Philippe Champagne announced Monday that he has suspended export permits to Turkey, which is backing Azerbaijan in the conflict, in line with Canada’s export control regime. He said he had instructed his ministry to investigate claims that Canadian drone technology is being used in the fighting.
Turkey, which has military cooperation agreements with Azerbaijan, accused NATO ally Canada of creating obstacles concerning the export of military equipment to Turkey “in a way that does not comply with the spirit of alliance.”