Sir Howard Davies in an interview: “Courses will strike again!”

Sir Howard Davies is considered one of the world’s leading financial experts. A look at his CV reveals why. From 1995 to 1997, Davies was Deputy Director of the Bank of England, Chairman of the UK Financial Market Authority (FSA) from 1997 to 2003 and 11 years as Director of the risk department of the banking giant Morgan Stanley. Today, Davies leads the troubled Royal Bank of Scotland, advising funds and the Chinese tax authorities. As for the future of Bitcoin, the implications of central bank cryptocurrencies and the role of Blockchain, Howard Davies answered some questions.

While Bitcoin hovered at astronomical levels last year, you compared the impending crash of the crypto-economy with Dante’s inferno. Since the all-time high of $ 19,783 in December, the Bitcoin price has fallen sharply. The inferno has occurred, but the Bitcoin not completely burned out. How do you see the future of cryptocurrencies? Is there a chance that the bitcoin will rise from its ashes?

Howard Davies: My Dante allusion was to the verse, “Give up hope, everyone you go in here.” I was particularly concerned with the warning to retail investors who thought Bitcoin investments could make easy money , I hope some people have listened! Recent price drops have proven that cryptocurrencies are highly volatile investments. But in the future, they could continue to play a role and I believe that the courses will pick up again – at least to a degree. However, I believe that cryptocurrencies will remain on the margins of the financial system and should stay there.

In addition to the price jumps, the past year marked a historic moment for the industry as the Chicago digital exchanges expanded their portfolios with crypto futures. Rumors are currently circulating that Goldman Sachs may enter crypto trading or Citigroup may create new investment opportunities for Bitcoin investors. Do cryptocurrencies have a place in the traditional financial sector? Are we even witnessing a much-debated Bitcon ETF  on the stock markets?

That is quite possible, but I sense a degree of restraint in the larger financial institutions. They [big banks] will be careful not to market exactly these investments to retail investors, where regulators will insist on pinpointing all risks. Personally, a Bitcoin ETF would make me nervous, but I think it could be true.

Last year, Nobel laureate Joseph Stiglitz said Bitcoin must be banned. Aside from such a ban, regulators need to do more to control and limit markets? What steps should legislators take?

Basically, it would not be easy to ban cryptocurrencies. If specialized traders want to trade with such investments, they should do so. For small investors, however, other problems arise. Here regulators should pay attention to the relentless disclosure of risks. Furthermore, they should target the indebtedness of investors. As investors absorb debts to buy high volatility assets, this creates financial stability risks.

Let’s take a look at the other side of the coin. From both science and banking, these days, you can always hear the promising potential of Blockchain technology for the financial sector. The opinions of some tech enthusiasts even go so far that decentralized data systems will make traditional banks superfluous in the future. What opportunities do you see in cryptocurrencies and the blockchain for the banking sector?

The underlying blockchain technology is certainly interesting for the conventional financial sector. It has safety benefits above all, but it does have to be measured by the risk of costs, as mincing new coins is expensive and consumes a lot of energy. However, the most promising benefit [of technology] lies in less glamorous areas such as legal reporting. Here companies have to disclose their business dealings together. The Blockchain is ideal for that – and there are certainly many other useful applications. All banks are currently working intensively on such solutions – both individually and jointly in consortia.

In a Guardian article, you point out that cryptocurrencies are “too big to look the other way,” especially from the central bank’s point of view. Currently, they are dividing into pigeons and hawks – those who open up to new technologies and those who care decided to oppose. As a former central banker, how do you assess the influence of new technologies on monetary policy and central bank activities, for example in the area of ​​interbank payments? What do you think about the idea of ​​state cryptocurrencies?

As the Bank for International Settlements (BIS) has already pointed out, cryptocurrencies currently do not meet the main criteria for currencies. Transactions are costly and their value is highly volatile. Moreover, they are not supported by any state authority. The latter point could be avoided if central banks issue cryptocurrencies. But do central banks even want direct financial relations with individuals and companies? That would expand their role and make them vulnerable to new risks. If I were a central banker, I would want to stay away from it.

One last question. In addition to her daily life as chairman of the Royal Bank of Scotland, you advise the Chinese government on regulatory issues. With her exclusive look behind the scenes: Do you see the chance of a Chinese opening for the crypto-economy?

This is China like any other financial market. They have first observed the arrival of cryptocurrencies and ICOs. Today, however, the regulatory environment is particularly restrictive. The Chinese authorities have taken the risks early and have the ability to intervene decisively. As long as the authorities do not change their mind, cryptocurrencies will have to subordinate themselves.

Thank you for the interview!

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