Stefan Ingves

Watch out, banks: Regulators could get you on Bitcoin

ECB President Mario Draghi And Sveriges Riksbank Governor Stefan Ingves Hold Basel III Framework News Conference
Stefan Ingves doesn't seem to be a fan of casinos. Source: Bloomberg

Stefan Ingves isn’t supposed to have his job. Since 2011 he has chaired a group of international regulators known as the Basel Committee that is charged with designing better rules for the global financial system in the wake of the 2008 crisis. His term technically ended in June, but since nobody else stepped forward, “I do what I do,” he told Handelsblatt.

What he has done, is to finally corral a bunch of unruly regulators around the world into agreeing a new set of accords — referred to as Basel III by regulators and Basel IV by banks — that tighten capital requirements for financial institutions. While many countries still have complaints — Europeans complain it disadvantages their banks while Americans don’t like the global imprint — Mr. Ingves remains confident that its tenets will be transformed into national laws.

But as soon as his job is done the next challenge for global regulators appears on the horizon: Bitcoin.

“Trading with Bitcoins is like going into a casino.”

Stefan Ingves, chairman, Basel Committee

So far, each country has taken its own approach to dealing with the emergence of cryptocurrencies, with some being more welcoming of Bitcoin than others. It’s fair to say that Mr. Ingves, who also heads Sweden’s central bank, the Riksbank, is a skeptic.

In an interview, he essentially warned banks to stay away from Bitcoin. Even if regulators are divided on how exactly how to deal with them, Mr. Ingves suggested banks could still face punishment if they’re not careful about who they do business with. That’s because existing money-laundering rules require banks to investigate their customers — or face fines.

“Trading with Bitcoins is like going into a casino. On top of that, you have the issue how to prevent money laundering when exchanging those electronic assets into euro, dollars or other currencies,” said Mr. Ingves, who spoke to Handelsblatt on the sidelines of a banking conference in Frankfurt last month. “Given that there is a risk of potential money laundering inherent to the market, it would be pretty difficult for banks to be active on a large scale.”

Banks will know exactly what he’s talking about. Germany’s second-largest bank, Commerzbank, for example has fallen afoul of “know your customer” rules in Britain and in Singapore. The point of the rules is to hold banks accountable for money laundering by their clients.

But unlike, say, Germany’s Bundesbank, Mr. Ingves is less skeptical about electronic currency per se. Sweden is fast becoming a nation where cash is barely used, unlike Germany where cash is still king. With paper money dying out, Mr. Ingves’ Riksbank is mulling whether to become the first central bank in Europe to adopt its own cryptocurrency, dubbed the E-Krona.

The idea is for the central bank to not just print currency, as they already do, but to offer it to citizens electronically — either through an app, a card or an account at the central bank. The point would be to let people hold currency outside of a private bank — even in a world without cash. “If cash disappears and the central bank isn’t offering electronic money, then households couldn’t hold central bank money at all,” says Mr. Ingves, but added: “We haven’t decided yet.”

A transcript of the full interview with Mr. Ingves, conducted January 29, is below.

Basel Committee on Banking Supervision chair Stefan Ingves addresses a news conference at the ECB headquarters in Frankfurt
Technically, Stefan Ingves' term as Basel Commitee chair has run out. Picture source: Reuters

Handelsblatt: Mr. Ingves, the Basel Committee in December finalized a series of global banking reform proposals known as Basel III, which were launched after the financial crisis. Are you happy that a compromise was found within your term?

Stefan Ingves: Oh yes! That is almost like a miracle, given that my term ended last June.

When there will be a successor for you?

You have to ask GHOS [oversight body of the Basel Committee]. Technically my term ended in summer 2017. But until someone new emerges, I do what I do.

Bank lobbyists are still hoping to water down some of the newly-agreed rules. Are you afraid that some countries won’t fully implement the new regulation?

It would be strange to first find an agreement after many years of negotiations, only to turn around and not stick to it. All the committee members have committed themselves to fully implement the rules. This is a firm agreement at the highest level so I see no reason why individual countries should not stick to it.

But we’ve seen countries not stick to global agreements when governments change. U.S. President Donald Trump for example said the country will quit the Paris climate agreement.

The alternative to international agreements would be a completely fragmented global financial system — at a time where you have increasing cross-border capital flows and banking activities. And also the banks themselves say they want regulatory certainty and the same rules for everybody.

The Basel Committee also discussed risk buffers or caps on government bond holdings of banks. So far such rules don’t exist. Do you see any chance that this will change?

We have discussed this issue in the Committee for many years. We succeeded in producing a discussion paper, which is a nice think piece. But there is no global consensus. For some countries it is an important topic, for others it comes way down the list. So I don’t expect an agreement in the next couple of years.

As head of Sweden’s Bank Support Authority in the 1990s, you saw the consequences of a financial crisis in your country first hand. Are the new Basel III rules strict enough in your view?

From our national perspective, we have always been in favor of a bit more. But the rules we agreed on are certainly better than what we have now. And you have to bear in mind these are only minimum requirements.

What do you think of cryptocurrencies? Is this a development that gives you headaches as a central banker?

As a central banker, I follow the debate with great interest because it is dealing with the design of the monetary system. The Swedish Riksbank was founded 350 years ago. It was the first central bank to issue notes. At that time, this was considered to be a wonderful technical invention. When the Riksbank got the sole right to issue coins and notes in 1904, this was new, too. Before that, most of the privately owned banks issued their own coins and notes. Nowadays we have to ask ourselves again how we should react to technological changes.

Do you want to be a pioneer again? Perhaps become the first central bank in Europe to launch an electronic currency?

The use of notes and coins has fallen in the past 10 years by 50 percent in Sweden — and this continues. If cash disappears and the central bank isn’t offering electronic money, then households couldn’t hold central bank money at all. The money in bank accounts is the money of private banks. The question is: do we want an environment where private households cannot hold central bank money? But we haven’t decided yet.

Is the Riksbank unhappy about the fast pace at which cash is disappearing in Sweden?

We are not pushing a product — cash or electronic money. But it is a fact that older people are not used to new technology, such as paying by cell phone. For some the process is moving too fast. Therefore it would be good if it slowed down a little bit. We don’t have any interest in stopping the technological change. But we need better ways [to deal with] the transactions of people who have problems absorbing new technologies. At the moment banks are not legally obliged to offer cash services. But it would be proper to force them to offer their clients the possibility of cash withdrawals and deposit cash.

Couldn’t electronic central bank money like the E-Krona foster bank-runs in times of crisis? People might decide to transfer their money to their account at the central bank.

It depends how you design it. You don’t necessarily give people the option to directly open an account at the central bank. In general, I don’t think electronic money would change that much in times of crisis. Today banks promise people that they can get their money in cash. This can also lead to withdrawals from that bank in times of crisis. The alternative would be a system where people are not allowed to withdraw their money from the banks at all.

Do you think cryptocurrencies like Bitcoin could replace electronic central bank money one day?

Bitcoin and its likes are not a currency. Their value is as speculative as the price for stamps, medals or pieces of art. There is no supervision of these markets. Trading with Bitcoins is like going into a casino. On top of that you have the issue how to prevent money laundering when exchanging those electronic assets into euro, dollars or other currencies. That raises the question how to prevent money laundering. It is highly likely that the public sector will have an eye on those developments.

Should banks be allowed to take part in that casino?

Given that there is a risk of potential money laundering inherent to the market it would be pretty difficult for banks to be active on a large scale, as they are supposed to know their customers. Otherwise they end up with trouble. In addition, the prices are obviously very volatile. That shows these cryptocurrencies are highly risky and have nothing to do with regular payment systems. Therefore I would advise banks to stay away.

You compare Bitcoin with stamps or art. But unlike stamps, you can even trade Bitcoin futures.

You could create futures on stamps, too, if you wanted.  But the important issue is: When technology changes and cryptocurrencies emerge, central banks have to deal with it. Money is a good created by central banks. If central banks produce a good product, people want to use it. If the quality is bad, then people won’t use it and you could end up with these cryptocurrencies. That is what you see in Venezuela or Zimbabwe, where the value of the money was destroyed. My job is to produce good quality, so that this kind of competitor becomes irrelevant.

Do you see any risks for the financial system from Bitcoin and the like?

Not presently, because in most countries the use of Bitcoins and other crypto assets are miniscule. The prices might be volatile, but compared to the number of payments or trading volumes in the stock or bond markets of any country, it is tiny.

So there’s nothing to worry about?

No. Regulators should keep an eye on it, but it is not a threat to the financial system so far.

Separately from cryptocurrencies, many experts believe that cyber risks are one of the biggest threats to banks nowadays. You said the Basel Committee wants to have a closer look at this topic. Does that mean the next big global framework, call it Basel IV or V, might deal with cyber risks?

No. There is no Basel IV around the corner. Basel III will take almost another 10 years before everything comes into effect. In the meantime, it wouldn’t be meaningful to start over again. But that doesn’t mean that there aren’t new issues emerging in the meantime and we expect to spend more time in the future in the Basel Committee on supervision in general.

Is there a possibility to implement global standards for cyber security?

What we deal with in the Basel Committee is how banks should deal with cyber risks. The Basel Committee can give guidance from a supervisory perspective. And we can talk about standards to prevent money-laundering and terror financing. But we have a clear focus on banks. Financial activities performed by non-banks fall outside the remit of the Basel Committee. The same is true for tax issues and other challenges.

Senior financial editor Yasmin Osman and finance correspondent Andreas Kröner of Handelsblatt in Frankfurt conducted the interview. Christopher Cermak adapted the interview for Handelsblatt Global. To contact the authors: osman@handelsblatt.com, kroener@handelsblatt.com and cermak@handelsblatt.com

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