it’s the final boss of the central banking world
and the architect of CBDC projects everywhere And naturally the bank for international settlements
is no friend of crypto either perceiving it as a threat to central bank control But as the
BIS’s latest research on crossber crypto flows makes clear crypto’s parallel financial system is
rapidly gaining ground It’s great news for us and terrible news for them So should we be celebrating
or perhaps worrying about central bankers putting crypto back in the crosshairs today we investigate
My name is Guy and you’re watching the Coin Bureau If you’re not familiar the Bank for International
Settlements or BIS is basically a bank for central banks and international financial institutions
The BIS is headquartered in Switzerland and is owned by its 63 member central banks for whom it
operates in the private market as a counterparty asset manager and lender As the central banks ring
leader the BIS has been leading the global charge towards the creation of central bank digital
currencies or CBDC’s It wasn’t always this way however BIS head honcho Augustine Castens said in
a speech as recently as 2019 that there was quote no clear demand for CBDC’s on the part of society
However the pandemic era cryptoboom seems to have changed his mind Castens and his colleagues have
since become CBDC evangelists positioning them as a safe reliable and publicly oriented alternative
to private digital currencies i.e crypto The BIS has now published a vast number of influential
reports working papers and speeches on CBDC’s And these have become the foundational materials for
many central banks worldwide with the BIS serving as the conductor making sure they’re all playing
more or less the same tune Now central to the CBDC push is the BIS innovation hub the internal
think tank established by castens in 2019 to foster international collaboration on fintech This
means a whole lot of CBDC scheming with the hub heavily involved in research It also actively
runs pilot projects with various central banks around the world through its outposts in Hong
Kong Singapore Switzerland the UK Norway Germany France and Canada The hub was behind for example
Project Enbridge the crossber payments pilot that was abandoned last year after complaints that
it would undermine the United States’s ability to sanction other countries Not to fear though
the hub has many other projects underway like Project Dunbar Project Helvetia Project Oram and
Project Cellar Another is project Nexus which aims to unify the currently fragmented landscape
of instant payment systems that exist around the world into a global network This is supposed
to reduce transaction costs and increase speeds and transparency for remittances At the project’s
inception in 2021 the head of the innovation hub former European Central Bank executive Benoir
Cur explained quote project Nexus is trying to achieve the equivalent of internet protocols
for payment systems That means creating a model through which any country can join by adopting
certain technical and governance requirements A payment systems equivalent of internet protocols
you say Well that’s an interesting idea If only someone had thought of it sooner Interestingly
there’s no mention of blockchain or crypto in the official project literature Not even distributed
ledger technology or digital assets get a shout out And this seems like a pretty conspicuous
emission considering that many of the problems project Nexus is supposed to address have found
a very popular solution already in crypto which is nothing if not a payment systems equivalent
of internet protocols Stable coins and lowcost highly performant blockchains in particular look
like an elephant in the room here enjoying rapid adoption as cheap fast and reliable means of
crossber payments for individuals businesses and institutions But instead the official project
literature emphasizes how Nexus will quote open the door to alternative payments infrastructure
such as CBDC’s Nexus which is slated to go live in 2026 is designed to ensure crossber transactions
comply with as many regulatory regimes as possible This means not just anti-money laundering
combating terrorism financing and sanction screening rules FX and capital flow management
measures and reporting requirements but also each country’s domestic monetary and financial
stability policies Hm financial stability policies sounds a bit euphemistic and could mean just
about anything a government wants it to doesn’t it now although the project literature doesn’t
acknowledge the popularity of crypto as a solution to the problem of costly and slow crossber
transactions the BIS is well aware of this state of affairs and is watching crypto like a hawk
As you would expect the BIS is no fan of crypto having variously dismissed and warned against it
over the years You know the story here First they were dismissive and said it wasn’t important Then
they said it was a danger for investors and at worst a tool for illicit activities When Augustine
Castens became the head of the BIS crypto prices were plunging from the heights of the 2017 bull
run In an inaugural interview posted on the BIS website he struck a more costic tone signaling
that the bank would be more proactive in its opposition to crypto under his management quote
“Cryptocurrencies are a bubble a Ponzi scheme and an environmental disaster While central banks are
not law enforcement authorities as such they can still show how these pseudocurrencies serve as
vehicles for illegal activities Cryptocurrencies are neither a good means of payment nor a good
unit of account nor are they suitable as a store of value They fail dramatically on each of these
counts So my message to young people would be stop trying to create money.” Thankfully nobody took
his advice and shortly afterwards stable coins and DeFi exploded in popularity And as crypto
became more sophisticated interconnected and popular BI is critiques increasingly focused on
the so-called illusion of decentralization in DeFi and the potential for stable coin runs You
can imagine then the field day they had in 2022 This was of course the year of terror FTX Celsius
BlockFi and things breaking all over the place in crypto But amid all the chaos stable coins
provided a path to safety for people in countries worst affected by fiat currency depreciation
The BIS observed this vector of crypto adoption in Turkey and Brazil for example and warned
of the cryptoization of their economies as citizens fled to crypto possibly undermining local
monetary policy Unsurprisingly the BIS doubled and tripled down on CBDC’s as the way forward framing
them as the safe and trusted evolution of money positioning them as superior to and a necessary
counterweight to crypto They are in reality a land grab by the global financial order to
neutralize the threat to centralized control posed by permissionless blockchains And all this brings
us to the present moment There is now significant political opposition to CBTC’s and dissatisfaction
with the role of the BIS innovation hub The BIS is trying to respond to this by placing a greater
focus on public trust and legitimate concerns around surveillance and privacy in CBDC research
and development Still there’s no indication that central banks will seed an inch of control over
CBDC’s Augustine Castens has explicitly said that with CBDC’s central banks will have quote absolute
control on the rules and regulations that will determine the use and the technology to enforce
that Meanwhile crypto continues to mature as an asset class and a technology enjoying adoption
by more and more people and bigger and bigger institutions It’s clearly not going away And
recently this seems to have led the BIS to take a much more nuanced and datadriven approach to
understanding how crypto is being used Of course what hasn’t changed are the conclusions Crypto
needs greater oversight and integration into existing regulatory frameworks or the development
of new ones specifically to manage the threat it poses to central bank control Well hello there
I know you’re enjoying the video immensely but I useful context for understanding the BIS’s latest
contribution to the academic literature on crypto This is the new working paper published by the BIS
and titled defying gravity an empirical analysis of crossber bitcoin ether and stablecoin flows The
paper begins with a standard disclaimer that quote the views expressed are those of their authors
and not necessarily the views of the BIS But we think this can be safely dismissed as the lead
author is Raphael A the head of the BIS innovation hubs eurosystem center A is one of the leading
architects of the global push for CBDC’s having published much of the foundational research
outlining their potential and mechanics as a future form of money By contrast his work on the
quote shadow crypto financial system frames crypto as speculative risky and a threat to regulatory
control and proof of work as quote doomsday economics Now although the working paper is
couched in technical language it’s best understood in the context of its author’s interests since
they’re hardly neutral observers The interests in question are of course maintaining the primacy
and stability of the centralized statecontrolled financial system So without further ado let’s
dig into our latest research contribution The paper uses two novel data sets to investigate
the trends and drivers of crossber flows of BTC ETH USDT and USDC between 184 countries from 2017
to mid 2024 The most eye-popping finding of the report is the magnitude of crossber crypto flows
which peaked at $2.6 trillion in 2021 alone To put that into perspective this sum was roughly
equivalent to 12% of the total global trade in goods during that year That’s both absolutely nuts
and a testament to crypto’s success It is now a globally adopted parallel financial system that
has grown despite all the warnings and naysaying that the old guard institutions like the BIS could
muster The leading stable coins USDT and USDC accounted for almost half of this massive volume
racking up $1.2 trillion in crossber flows in 2021 This is exceptionally impressive considering that
Tether’s USDT reached a $1 billion market cap just 4 years prior That’s a seriously rapid pace of
adoption Now two major drivers of these crossber flows were trade and remittances i.e people who
work abroad sending money home The authors found quote signs that crypto transactions emerge as
a substitute for remittance payments Country corridors characterized by high remittance costs
or slow processing exhibit larger crypto asset flows This relationship is more pronounced for
stable coins than for unbacked crypto assets It is also more pronounced for low-v valueue
BTC transfers than for large value ones With many workers now asking to get paid in crypto we
see this as the market’s direct response to the inefficiencies of fiat currencies for crossber
transactions where traditional banking is too slow too expensive or too restrictive When it
comes to mapping out crossber crypto flows by country the paper’s authors acknowledge
that this can only be an approximation That’s because blockchain pseudonymity and the
prominence of offshore crypto exchanges of unclear doicile make it impossible to comprehensively
attribute transactions to users Nonetheless they make a pretty convincing attempt using quarterly
data on flows between crypto exchanges including labels attributing wallet addresses to particular
entities They then allocated entity flows to locations based on statistics on their user base
They approximate the geographic profile of crypto flows by complementing their data with app usage
data of the respective exchange or the web traffic of a crypto exchanges website So for example if
60% of an exchange’s app usage originated from the US then 60% of all crypto in and outflows to
this exchange were allocated to the US With this method they produced a pair of maps showing global
BTC and USDT flows for the first half of 2024 with arrows between countries representing bilateral
flows of 1 billion or more The two maps couldn’t be more different with the vast majority of BTC
flows either originating or terminating in the US Contrasting with a much more global distribution
of flows in Tether’s case we suspect that the US- ccentric Bitcoin map might have something to do
with the growth of the newly launched spot Bitcoin ETFs in this period That’s because they led to a
sharp increase in the amount of BTC in the custody of Coinbase which is of course based in the US
That would account for the concentration of flows in the US But on the other hand it doesn’t explain
the relative lack of flows between other countries If you look closely though you can see that the
UK is another major hub for crossber flows The paper explains that the UK and US accounted for
about 20% of crossber activity in BTC and USDC and close to 30% for ETH It also points out that this
map represents a significant departure from the earlier years in the period of study when China
accounted for a much larger proportion of flows China has certainly tightened the regulatory
screws since 2017 So this makes sense and according to the paper China’s loss is India and
Indonesia’s gain as their share of crossber flows has been increasing Moving on the USDT flows
for the first half of 2024 are a completely different picture with broadly distributed arrows
connecting territories all around the world from Russia to the UAE South Korea to South America
and the US to Western Europe and India and so on The authors highlight Turkey and Russia as two of
the biggest players accounting for 12% of crossber USDT flows As flows leapt from $10 billion
in 2019 to more than $1.1 trillion in 2023 to 2024 Turkey apparently became the second
largest receiver and sender of USDT Just as the BIS has feared crypto has enabled people to
escape the fiat currency ponopticon or at least gain some degree of freedom within it since we
are talking about a US dollar pegged stable coin here after all USDT has provided Turks with
an escape from runaway inflation and ordinary Russians with some degree of relief from Western
sanctions Now having ascertained these flows the authors then turn to the question of what exactly
is driving them For BTC and ETH the paper points to speculative motives and global funding
conditions It’s certainly true that people are buying these assets and particularly BTC
because they’re betting they will increase in value But seen another way people are betting on
the value of central bank issued fiat currencies eroding over time And this is not speculation but
a matter of fact as a much harder form of money Bitcoin is a hedge against this inevitability
Now global funding conditions are inextricably linked to this because it is easy or loose funding
conditions meaning money printing that causes the purchasing power of fiat currencies to weaken
thereby creating demand for such a hedge from people trying to protect their savings By contrast
crossber flows of stable coins and interestingly also low-v valueue BTC transactions are largely
driven by transactional motives particularly for remittances This is further evidence of crypto
solving realworld problems namely high remittance costs These costs are a feature rather than
a bug of existing financial architecture with crypto enabling low costs by circumventing
rent-seeking intermediaries The paper then uses something called a gravity framework to
address the question of whether crypto is actually creating a borderless financial system which is
of course one of its core tenants This framework predicts that crossber flows between two countries
will be proportional to their sizes and inversely proportional to the distance between them In other
words bigger economies attract more flows like how larger planets have a stronger gravitational
pull Meanwhile distance creates friction and cost suggesting less flows between faraway countries
Having applied this model to crossber crypto flows the authors found that although economic
size still matters geographical distance and traditional barriers like sharing a border or
language curb crossber crypto flows far less than they do for fiat currency flows Hence the paper’s
title Defying Gravity In other words there’s compelling evidence to say that yes crypto has in
many ways already created a borderless financial system as crypto tends to flow around obstacles in
the physical world in a way that fiat currencies do not And this leads us to the next major
conclusion of the paper which is that capital flow management measures or CFMs are largely
ineffective against crypto The authors find that many people are able to circumvent CFMs by using
crypto Of course what the BIS calls circumvention is likely experienced by these users as a
better system that offers empowerment financial sovereignty and freedom Now if traditional levers
of state financial control don’t work on crypto then it’s rather a big win for crypto and for the
individual But for the state it means the loss of policy control threats to monetary sovereignty and
the potential for illicit finance And that’s why research like this from the BIS makes us a little
nervous because its findings will undoubtedly spur efforts to reassert central bank control over
our financial destinies And we can already see this in action with the UK’s Parliament for
example recently voting to require crypto firms to collect and report to the government
sensitive personal information on UK clients for every single transaction they are involved in
Any unreported transactions will be liable for a £300 fine So keep your eyes peeled for invasive
measures like these coming to a jurisdiction near you if the BIS keeps yapping about how much
financial freedom crypto affords its users Folks hold on to your sats because as crypto continues
to grow governments are going to try harder and harder to claw back the freedoms it allows us The
good news is that political opposition to CBDC’s continues to pick up steam And of course we also
have a wild card in play namely a crypto activist US government So talk about friends in high places
And for all the latest on that unlikely oasis of crypto positivity you can check out our video
on President Trump’s shitcoin banquet and how it might be coloring US crypto legislation
right over here I’ll leave it there for now folks But as always thank you for watching and
I’ll see you next time This is Guy Over and out
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