Huw van Steenis On What Central Banks Will Do Next

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. My co-host, Joe Weisenthal, is away this week. I've actually noticed a pattern to Joe's absences, which is that he suspiciously goes missing whenever we're scheduled to talk about negative rates on the show.

In any case, we recently had the annual gathering of monetary policymakers in Jackson Hole, Wyoming. And as you can imagine, negative interest rates were a big feature of that meeting. And in fact, the title for this year's symposium was Challenges for Monetary Policy, which kind of gives you an idea of the head space that a lot of central bankers are operating in at the moment.

But one of the most interesting things to come out of Jackson Hole this year, certainly a thing that got a lot of attention was a speech by Bank of England Governor Mark Carney, where he talked about the idea of getting rid of the dollar as a reserve currency and basically replacing it with a virtual currency that would look a lot like Facebook's Libra in the sense that it could be a sort of consortium of digital currencies maintained by central banks, a multipolar virtual currency. He actually called it a synthetic hegemonic currency or SHC for short. Now, Carney's idea did raise a lot of eyebrows, not least because central banks have been critics of cryptocurrencies in general and of Libra in particular. So I thought to myself, who better to help us gain more insight into Carney's thinking and to also talk to us about negative rates and the future of payments and the future of all of finance, in fact, than Huw van Steenis. Huw chaired a review of the future of finance for Mark Carney and was his senior advisor at the BOE. He'll also be shortly joining UBS as an advisor to their CEO, and he's taking a break from his gardening leave to come on Odd Lots. Huw, it's so good to have you.

Huw van Steenis (2:11)

Tracy, thanks so much for having me.

Tracy Alloway (2:13)

So I guess we need to start with Carney's Jackson Hole speech, but we do know that Carney is due to leave the BOE in a few months. So I guess my question is, since you are someone who worked quite closely with him, how seriously should we take his proposal for this sort of multipolar virtual currency?

Huw van Steenis (2:37)

Well, look, I mean, I'm going to speak for myself here rather than for Mark. I mean, I thought it was a really great speech because it put its finger on a number of the dilemmas that policymakers are wrestling with. I mean, first, let's be clear. Technology is transforming the basis of advantage in financial services, and big techs are entering, fintechs are playing, scale is far more important, and the regulations need to catch up. So I think first and foremost, it's about the way technology is transforming the system.

I think second is that payments is the battleground between big tech, payments firms, and banks. And it's kind of existential. And as you've pointed out regularly, Tracy, the combination of negative rates and a disruptive environment is one which is an existential threat for banks.

And I think the challenge for firms entering payments, Libra, Facebook is just the first of which, most recent of which, is pretty challenging. And I think that one pushback that some had is that, this was a little bit right out there in terms of forward thinking.

But one question I often got challenged is, what can we learn from the Chinese financial system? Is it just the Galapagos of the financial world? And I think it's not science fiction. There you've got Ant Financial and WeChat Pay controlling 90% of online payments, and Ant Financial now has got the most customers of any financial services firm in the world. If you can combine what they've got in China and India, it's over a billion, five-time city group. So I think that this payments both in terms of currency and in terms of new entrants being the battleground, I think he's put his finger on something really important.

Tracy Alloway (4:13)

Right. And China has actually announced that it is close to releasing its own cryptocurrency, whether or not that's going to be an actual cryptocurrency or something that's more akin to digital cash, we don't know just yet.

But definitely there seems to be some interest from some central banks, at least, in virtual currencies. So just on the notion of payments, you've said before and you just said it then that payments are now the battleground. Can you expand on that a little bit? Why is there so much pressure around this particular space?