Mark Carney: “Banks are prepared to make climate change commitment at COP26”

Mark Carney, former governor of the central banks of England and Canada, was recently appointed as the United Nations (UN) special envoy for climate action and finance. He also took on the role of finance advisor to the United Kingdom (UK) which is hosting the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow, Scotland in November. 

In this interview with Emmanuel Daniel, Carney shared his belief that the world can limit global warming to 1.5 °C in line with the 2015 Climate Change Agreement and the financial sector is prepared to commit to the necessary disclosure requirements. 

Carney also talked about his new book, "Value(s)", which drew on his experience in handling crises during his time as central bank governor of Canada and England.  

Here are the key points that were discussed during the interview:

• The overall objective of COP26 is to keep the global warming level to 1.5 °C 
• The Network for Greening the Financial System is focused on understanding the physical and transition risks related to climate
• China’s economic growth ambition is parallel to its commitment to addressing climate change
• Green bonds and green loan markets will continue to grow in countries like China and India
• Bitcoin is a vehicle for investment and speculation; it does not aid in the processing of the economy
• There is a need for the central bank to move to a system that has the benefits of a programmable currency
• Carney’s book “Value(s)” touches on how to get the balance right between the values that are necessary for the market to function and how the market is put in service

The following is the edited transcript of the interview: 

Emmanuel Daniel (ED): All of us know him as the former governor of the Bank of England. He is today the UN special envoy for climate and finance, garnering the finance industries’ response and commitments to the climate change agenda in preparation for the COP26 meeting that is going to take place in Glasgow at the end of this year in November. Because he works with the networks of banks and supervisors, I want to get a sense of how the finance sector is preparing for its commitments to the climate change agenda. We had a wide-ranging conversation. We talked about cryptocurrencies and central bank digital currencies. His views are actually very well known in other videos, in other conversations he’s had. But I want to test him on his idea of the architecture of the central bank digital currencies and where the bridges are with cryptos as they are evolving right now. In preparation for this conversation with Mark Carney, I also came across the fact that he just published a book called “Values” so I asked him a little bit about that and tested a couple of ideas from an emerging market perspective. So here is the conversation. 

Mark Carney (MC): Emmanuel, first thank you for having me. I'm a big fan of The Asian Banker so I appreciate the conversation. So in two respects, when I was governor, one of the responsibilities as governor of the Bank of England at least is you oversee the insurance industry, Lloyd's of London, they're very good at managing climate risks because they have tremendous climate exposure. So you naturally develop some expertise there. And then, with the run up to the Paris accord, we helped develop the Task Force on Climate-related Financial Disclosures (TCFD) and other tools, including very important work with the People’s Bank of China (PBOC), launch of the Network for Greening the Financial System (NGFS) as one of the co-founders with them and the Banque de France. So I was active in it as governor.

Just as my term was coming to the end, the United Kingdom (UK) was assuming the presidency of the COP. So this was last year and I was asked by the Secretary General and Prime Minister Boris Johnson to help with the private finance agenda. So this is focusing on private banks, insurance companies, pension funds, etc., globally, and organising the system so that it has the information, the tools and the markets they need to manage climate risk. When I agreed to do this, it was back in January-February of last year, and I thought, well, I'll be doing it until the end of the year, which was the original timing for COP. As it turns out, it's pretty much a full time job and I've been doing it since then. I'm grateful for it. But it's been longer than I expected.

(ED): You're doing it pro bono. That's the interesting side. So you must be paying for a past sin somewhere. A lot has happened since the previous meeting and now in preparation for COP26 working up to the agenda. Then there was the United States (US) getting out of the deal of the Paris Agreement and getting back in and President Joseph Biden had his global Leaders Summit on Climate this year. So just bring us up to speed in terms of what the preparation is for COP26 and the issues that you've been assigned to cover and finance in the private sector, one of the top of mind issues that you're dealing with leading up to the November meeting.

An environmental summit

MC: The overall objective of COP26 is to keep that one-and-a-half degree target that was set in Paris within reach so that ambitious country objectives and programs, so-called nationally determined contributions (NDCs), that when we bring them all together, we look at these and we say that the world still has a chance to reach one-and-a-half degree. There's other major country level issues to be sorted out. I'm focused on the private finance side. Our objective for that is twofold. First is to make sure that financial institutions, whether they're banks or sovereign wealth funds, pension funds, have the information, that type of climate disclosure that they need. That they have the tools which would include scenarios for stress testing and assessing whether an asset or a company is on a path towards net zero or not, and if so, what are the risks being run? And that they have markets and that means new markets like a market for carbon offsets, as an example, a true global professional market, a $100-billion-a-year type market, not a niche, amateur market as it is at present. So the part of the job, part of what we're doing is working with the private sector as a global effort. There's a series of working groups, there's thousands of people working on these issues to develop exactly that. That agenda is making tremendous progress. We've just had a Group of Seven (G7) meeting, which has agreed to have mandatory disclosure. We have the International Financial Reporting Standards Foundation (IFRS), which is developing climate disclosure. We have Bill Winters’ work on carbon offset, it's moving forward, etc. So all of that. 

The second big thing we're doing is getting commitments from financial institutions themselves to manage their portfolio consistent with what the governments are doing. If governments are committing to net zero and that is the case now for covering 70% of global emissions. But when I took on this role, it was only 30% of global emissions that were covered by net zero commitments. So you bring the two together. You have a situation where financial decisions will take climate change into account. The information will be there, the tools, the markets, to express those views and financial institutions themselves will be making judgment about who is part of the solution and who's still part of the problem, and allocating capital accordingly. In the process of doing that, and this is increasingly understood, not just managing risk but creating tremendous value. This is an enormous commercial opportunity that is really developing. 

ED: Commercial opportunity. Let's get back to that phrase along the way. One of the interesting things about talking with you as the governor of the central bank now dealing with climate change and how it's going to be applied in financial services, there’s this whole dimension of the finance industry, banks, insurance companies, asset management companies, and in many jurisdictions, including the UK where you are governor, you're regulated by banking regulators. There’s the capital market aspect to it. There’s the ground level lending business. Give me a sense of the conversations that you've been having with governors of central banks, just generally, but also specifically in the large countries like China – I'm here in Beijing – and then in India and some of the leading regulators like Singapore, Hong Kong, the United Arab Emirates (UAE). What's the flavor of the conversations? What’s the level of commitment, and what are some of the issues and difficulties that they are facing?  

MC: If we go back five-and-a half-years to the Paris accord, just after that, there was a group formed with the People's Bank of China, Bank of England, Banque de France, Netherlands, a few others. Eight central banks formed a group called the Network for Greening the Financial System. The objective was to develop the tools and expertise to manage climate-related risks. So to do our jobs as bank supervisors and with our responsibilities for macro prudential risks and financial stability, to address the those risks around climate, and to help the private sector do their job to develop that expertise. Fast forward to today, there are 90 central banks that are members of that group, covering 85% of global emissions. So the core of the whole of the global central banking community and supervisory committee coming into that, including People's Bank of China, the Reserve Bank of India, the Monetary Authority of Singapore (MAS), Singapore, Bank of Japan, the Asian central bank authorities, the Japanese Financial Services Agency (JFSA) as well in Japan, so their front and centre on this. 

Understanding climate-related risks 

So the conversation among central banks is very practical. It is it is very focused on understanding the risks related to climate, which, of course, there's one class of risks, which are physical risks, unfortunately, which we're being hit with and the impact backed on property and supply chains. The second and the biggest form of risk is transition risk. What happens as we move towards solving this issue, which assets are stranded, which companies profit, but which companies are made less competitive and are banks ready for that? One of the big things that has been done is that a group of central banks has released climate scenarios or global scenarios. They drop down to the major country level, they drop down by the sector level for companies. And they can be used and they're intended and they will be used by banks and financial institutions to help manage their risk, understand their risk over a 10 year-, 20 year-horizon as we move or not. Because we could move towards net zero and less than two degrees, or we could basically be on a business as usual path and  from a risk management-perspective, board, senior managers, that's what you want to understand and then position yourself accordingly. So the short answer to your question is very practical, very focused discussions. The other point I would make is that very broad-ranging discussions as well because it's also about central bank operations – their own risk on their own balance sheet, their own disclosure around that. And we will see more and more of that in the years to come.

ED: How’s the US, the Federal Reserve Bank system involved in it? How have they come on board? I noticed that Larry Summers made a comment just a few weeks ago saying that pandemics are more important than climate change at this point. So what's the tone? What's the engagement level with the Federal Reserve Bank system?  

MC: The Federal Reserve Bank has joined the Network for Greening the Financial System. All central banks have ranges of responsibilities. So the Bank of England has a very broad range of responsibilities. The Fed’s a little more narrow and so they address it accordingly. But let me address that comment. Of course, the major issue is to vaccinate. Central banks are managing the near-term economic and financial ramifications of COVID-19 and hopefully the exit from COVID-19. I'm sure they'll manage that well. But they also have the responsibility and the capability of doing more than one thing at one time. And that responsibility and capability is making sure the financial system is well placed to address medium and longer term risk. When it comes from an economic perspective and when you look at the enduring economic impact of climate change, there’s the International Monetary Fund’s (IMF) work and others. 

Climate change is a much bigger economic impact and a much more enduring economic impact on the global economy, particularly in Asia than COVID-19. Climate change is an issue we can do something about in advance. We all wish we had done something about COVID-19 in advance. So I respect that comment, if I can put it that way. 

ED: I’ll just keep drilling down into the application at the national level. There's this nationally-determined contributions that each country has made. Now many countries will have conflicts between continued growth and then the transition, as you mentioned. China especially has made very bold contributions at the global Climate Summit. They committed to peak emissions by 2030 and carbon neutrality by 2060. But on the ground, bank lending to coal-intensive industries still continues. How are countries like China and perhaps several countries with the same problem, how are they making that transition?  

MC: Every country will undergo a structural transformation. So there are many industries and activities. Virtually everyone has to change in some ways. Some will find it easier, others much more difficult. There is no long-term future for coal. That's the bottom line. It's a question of the timeframe for phasing it out. The sooner we phase it out, the better. But in some countries, that's a bigger challenge than others. I recognise that. We cannot come close to  our climate objectives if we burn all the coals in the ground. It's very simple math. 

China’s climate change goals 

China has very important series of commitments that they have made by their choice. The first is the macro commitment, the 2060, 2030 commitment. But then also President Xi Jinping at the Biden Summit observed a sort of peaking in activity for coal in 2025 then a beginning of phasing down that wasn't overly specific so I don't want to read too much into it. But again, consistent with the transition. One recognises that in China's level of industrialisation activity there's a timeframe for that transition. But of course, in your question, it was originally motivated on economic growth, when you also turn it around in terms of the growth opportunities for China in the present and the future. This is the country that is the world's largest solar producer. It's the world's largest zero emission vehicle producer. It rightly has very strong ambitions, intentions, in a range of industries that are the industries of the future, the exports of the future, the growth creators of the future, which happened to be parallel to also helping to address climate change. So the economics actually stack up pretty well.

ED: The Bank for International Settlements (BIS) had its meeting and the BIS’ entire dialogue on climate change involved a lot to do with bond purchasing and monetary policy. How's the BIS evolving? How are they onboarding the measurements that you talked about and the commitment levels? Just a shorthand way of asking this question is, will we see a Basel 4 that has climate commitments worked into it somewhere. 

MC: I distinguish the Basel Committee, which is a committee of central banks and supervisors, which is looking at it and said that they are doing a comprehensive review of their facilities and their supervisory practices related to climate risk, which is very welcome. The Financial Stability Board is also doing the same and due to report to the Group of Twenty (G20) in July on its assessment of the issues and what the forward agenda will be. Thirdly, what you're seeing is less from the BIS’ perspective, but by member central banks, most notably the Bank of England and the European Central Bank (ECB). But there are others who are looking at this to examine their facilities, their central bank monetary operations and saying, how consistent are those with climate change? In other words, corporate bond purchases, what types of bonds are favored versus others, and the Bank of England is consulting on this at the moment. There will likely be a tilt – this is their words – towards those companies that have a plan to reduce their emissions even though they own about only about 6% of that bond market. Given the collateral ramifications and others, it's likely to have a significant impact over time. But from their perspective and the system's perspective, it's managing a risk accordingly.

ED: In addition to talking with you, I actually talked with a number of chief executive officer (CEOs) of banks across Asia. They've already started reporting green finance, what percentage of their assets are carbon neutral. You get this feeling that they’re just greening their books at the moment. Is there a transition phase where some of these are actually window dressing and then it becomes real at some point? 

MC: I might put it a little differently. There may be a learning curve, an initial development of the expertise that institutions go through. That's natural. It starts with more niche products. Green bonds aren't necessarily a niche product, these are quite widespread now, but these are not mainstream finance. Your question brings out a very important point. We are not going to get to net zero, with specialised niche, green products loan as valuable as these are. These have to be part of mainstream financing. So let me put it in context, which is also what happened at President Biden’s Summit in April. Apart from President Xi’s comments and some other commitments other countries made is that we formed an alliance of major banks, insurers, pension funds and others asset managers with balance sheets of $70 trillion. That’s huge for the Glasgow Financial Alliance for Net Zero and their commitment is not about a portion of their assets going into green. It's about managing towards net zero and not just in 2050, but with interim targets in 2030 and 2025. Then specific strategies that they determine. They determine all of these for specific sectors. 

The heart of the system is moving towards managing the entire balance sheet in the direction of that zero. Critical point here is that part of what they do is they finance a steel company, a cement company, an auto manufacturer, and even an energy company that is making investments to reduce their emissions. And this is the key thing, we want capital to flow to companies that have a plan to reduce emissions. We don't want to just flow to the end state to the green. We know we can't move overnight to only funding renewables. It would be wonderful if we could, but we can't. The important thing is that capital will move to those companies that have a plan. It is very capital intensive to move this way. It's one of the reasons why there is a huge gross domestic product (GDP) and job multiplier effect of the transition.

ED: The fund managers are very good at telling a story of the profitability of assets that are invested in diversity and impact investments. Is there a profit motivation that the banks are looking for? A story that they can tell?  

MC: It’s more than a story. This is an enormous commercial opportunity. I can tell you the net downside story – it is going to be increasingly expensive to own assets that are carbon uncompetitive. There will be regulatory moves, there'll be carbon prices, there could be potential trade moves. Companies that are not moving to reduce their carbon footprint will become more and more uncompetitive. On the other hand, companies and activities that are reducing carbon, reducing the risk to the climate, that's creating tremendous value. There are various ways I can draw out the commercial opportunity but one of them is just to point to the scale of investment that's required. So it's on the order of doubling of energy infrastructure investment every year. So going from roughly a little more than $2 trillion a year to around $4 trillion, the International Atomic Energy Agency (IAEA) estimates $5 trillion a year. Now 50% of that will be in Asia. So there's enormous investment opportunity. The bulk of it is in Asia, as it is with many things. Financing that, investing in that, will bring profit. It will be done on a profitable basis. 

ED: In how many countries will that need to be subsidised in some form or another? In other words, it's not just commercial bank lending, but subsidies. 

MC: The biggest subsidy right now is to the energy sector, which is producing this enormous externality which is causing very large scale climate risks and extrapolating climate risks. The estimate on the level of impact on GDP by mid-century is something on the order of 10% globally. That's a pretty large subsidy that exists right now for the energy industry from not properly pricing carbon, first point. Second point is the cost competitiveness of renewables. This is economic. This is more competitive than new coal generation, new gas generation. We need to make further advances in battery storage and others when we get to scale large proportions of grid, confident that those will come. So where the questions around supportive policies come is more towards hydrogen, which is close to being economic but not economic on the so-called blue hydrogen, around green hydrogen, around elements of carbon capture, sustainable aviation fuel. Those  areas, that's where the concentration is but the core of renewables and increasingly in zero emission transport, it is economic and cost competitive today. Which is why the commercial opportunity is so attractive.

ED: Something that I noticed in high growth countries is that when you put on more regulation, you inadvertently create a kind of a shadow banking system. You get a lot of the financing seeping through other forms, other channels, especially to small businesses and businesses that have difficulty getting credit. That's more in developing countries than in developed countries. What are some of the concerns that maybe central banks might have told you or that you are aware of? Of too much regulation or of the idea of some new form of side financing platform evolving as a result of this emphasis on climate change?

MC: It is a disclosure issue. It's the extent of the breadth of commitment to a climate pathway consistent with net zero. Let me be more specific. So the extent to which that financing is coming from, shadow banking, which is a very broad term but it often captures alternative investors. Shall we say private equity, hedge funds, others. Most of the funding of alternative investors or much of it comes from asset owners, so pension funds, life insurance companies, sovereign wealth funds, in some cases. The question being asked of those pools of capital is are you going to align with net zero, if you're in a country that itself is aligned to net zero. Once you have made that decision, then your desire and the appropriateness of financing someone in the shadow banking, who's actively moving against that goes away. 

Secondly, most of the shadow banking sector operates on leverage. A lot of that leverage is tied ultimately back to the banking sector, which is why there is $30 odd trillion of assets in the banking sector that is committed now to net zero through this classical alliance. Now we're going to look into growing that and transitioning it appropriately. But we have to be conscious of these risks, as we always do. We will start with those advantages. The last point I'll make from my long time as a regulator than as banker – it is the responsibility of the authorities to know what's going on. There needs to be light in the shadows. We need to know what's going on then decisions can be made by appropriate authorities, whether there's comfort in them. 

ED: I only ask this question because I've seen it happen in different iterations before. Capital markets for carbon trading, capital markets for infrastructure, for long term projects, how are these evolving? What would you like to see happen? 

MC: There were a few missing markets or maybe underdeveloped markets. So one of those is the market for carbon offsets. Just to be clear, what we're talking about is private purchasers, companies that have committed to net zero. Take the example of Microsoft, which is committed to make up for all the emissions that ever happened since Bill Gates founded it in Albuquerque. The only way you can do that is to offset carbon. It has to purchase or invest in new forests or in some form of removal of carbon from the atmosphere. That market, there are examples of trades and investments that way, but as a market, it doesn't properly exist. Now this, it’s a $100 billion-a-year market is our estimate within a few years, counting for about 10% of reduction. We're working hard to develop that market. I expect that there'll be a very important Asian hub for that market, potentially. There are those who are interested in hosting it and maybe I should get my hands on it. Another market that's exceptionally important when you look at Asia more broadly is a market for blended finance. A market where project finance with some of the risks assumed by either multilateral development banks or governments that then leverages  private capital at scale? 

ED: Basically, you want to see depth liquidity and you want to see instruments being created. It's been a while since carbon trading could have been developed much further but I think it's moved very slowly. Also in addition to government subsidy, to see aid being directed more accurately and more generously to the least developing countries, that's an area that there seem to be some issues. I am seeing some numbers that could be much better than it is right now. So depth and liquidity, a market that takes into consideration that this is a long term type of instrument and not just corporates being able to offset but it becomes a market in its own right. Which do you think are the countries that are likely to create markets? What are the ingredients that a green finance markets?

Green bond expansion 

MC: There are many aspects of green finance. In the major jurisdictions, major countries like China, India, others, there will be local currency and these are already developing and those will continue to grow. So local currency, green bonds, green loan markets will develop. On the carbon offset side, what's likely to happen with that market is that there's a core exchange traded contract, which is a reference contract for what is ultimately going to be a large over-the-counter derivative market. The nature of those markets is there's some concentration but these can be traded more broadly. I'd stress that the scale of the change in investment, $2 trillion, potentially on some assets per annum, which is a very large number, both of which is in Asia is such that it really becomes about that moving into the mainstream financing markets over the medium, longer term so that it's financing. 

Of course, there is a reference, there's an architecture and reporting that for both companies and financial institutions about the extent to which they are aligned with net zero, the extent to which their portfolios are moving in that direction. But they're basically financing in mainstream markets and that information will be available, they'll be able to make these calculations, these assessments and do what they do best, which is pick the companies they want to back, whether with lending or investing.

ED: The conversation is going in the right direction, it's a long haul. I just want to transition into another topic where you've provided leadership – cryptocurrencies. I want to transition it by connecting it first to climate change in the concern that cryptocurrencies use a lot of electricity. What if cryptocurrencies did not use non-renewable energy sources? If the electricity that was used was from dams and renewable sources, would that make a difference to your perception?  

The negative impact of cryptocurrency 

MC: It would make a difference to the climate, because the orders of magnitude of the power consumption of Bitcoin, for example, is remarkable in a bad way, given the relative contribution of Bitcoin to the functioning of the economy. It's not a currency. It's not aiding the processing of the economy. It's a vehicle for investment and speculation and ransomware in other applications. The question is in terms of ultimate use of renewables for cryptocurrencies is what's the opportunity cost of that? In other words, we've been talking about the scale of investment that's required in order to transition. It has nothing to do with cryptocurrencies, the scale, that $2 trillion. There is more than enough demand for this type of investment and need for this type of investment – solar, wind, hydrogen ultimately, and others – in order to drive the economics of this, in order to drive the returns. We don't need another use that cannibalises some of that. 

I will observe though that not all crypto currencies are created equally in terms of energy consumption. In fact, Bitcoin in many respects, is an outlier. And the incentives are very strong to reduce the energy consumption of them. I will also note that distributed ledger technology has many applications and some of those applications are quite interesting with respect to climate. For example, tracking carbon offsets, these are markets that need to have integrity and the traceability of an offset and is important for the integrity. There are various ways to do that. There are companies working on this through distributed ledger technology, which also would have the benefit of efficiency and sort of straight through processing for transactions as well. So in the extreme case of Bitcoin and energy, I don't see it but as you move to other applications, there are some that are quite interesting. I’ll call these broader fintech solutions.  

ED: Actually the real value in cryptocurrencies is that anyone can design and issue one. It's not just the fact that a lot of cryptocurrencies that are generating a lot of capital in themselves, but you can have a thousand cryptocurrencies if you wanted to and that changes the nature of what we mean by money and form of exchange.  

MC: There's a period of innovation and then it will settle down at some point. You get creation and private money when there's a gap in the payment system, basically. So what gap is being filled? Is it a gap for illicit activity? Well, that's not very good. We don't want that. Is it a gap because there's an inefficiency in the way this financial system is organised? For example, in some of the settlement for wholesale financial transactions, that's true. And there are applications there. Is it a gap related to carbon that could be filled? So, anyone can create one, but as Hyman Minsky said, anyone can create money, the trick is to get it accepted. 

Ultimately, having these monies accepted is going to be for the use case of the money and how effectively it does it and then the judgment in the fullness of time will be well, is that better done with private money or will public central bank digital currency, public money, ultimately, crowded out. And I can see both coexisting side by side. Some private with public because of these use cases but the bar is relatively high for those. I certainly do not see that the core use case, day-to-day transactions will be private money at central. I don't mean inside money, money creation. I mean, there will be a central bank digital currency at the center of the system, in my view.

ED: Central bank digital currencies. You tend to focus a lot on the wholesale side of central bank digital currencies. There are countries that are deploying these at a retail level. What should they be? What are the elements of a good central bank digital currency in your view?

MC: We have a system today in virtually all our economies where the vast majority of money is created by the private sector. Bank makes a loan, it's creating money. It must have capital in order to make that loan. But that's the system and that's the system that works quite well. The public doesn't realise it, by and large. They think money is money and that's a good thing. 

Part of our job as central bank is to make sure that that confidence is maintained. 

A system for programmable currency

I don't see a reason to change that system such that the central bank crowds out the private banking size. I see lots of reasons not to change that system, but at the same time to move to a system that has the benefits of a programmable currency, the true elements if you will, of digitisation. So that's why I tend to be more on a two-tiered system, wholesale being the central bank digital currency so that the instantaneous settlement is at the level of the central bank but for many more players  than public accounts, in effect, directly with the central bank, either on an account basis or tokenised basis. That's where I think that the most robust and competitive system will be and competition in a good sense of private financial institutions trying to provide better service. 

ED: In so far as central bank digital currencies, basically electronic money, you could hijack an existing digital wallet and call it central bank. The account is maintained at a central bank rather than in a private platform or a commercial technology company. Also this thing called token. I've been reading the papers issued by different central banks. These are actually far more rudimentary than imagined and to a large extent, this whole idea of token is not the same as a crypto token, which is blockchain centric, it's basically being able to deploy money offline, when it's needed. 

On the wholesale side, the countries that are interested in internationalising their digital currency, they don't want to give things away. The whole idea is attractive because you're able to land your currency offshore without losing control of who's borrowing it. So that's the kind of philosophical divergence between the countries that are liberal and open and the countries that are going into central bank digital currencies (CBDCs) with a very controlled mindset in view. Do you see that difference? Or do you have a certain philosophy about what it should be? 

MC: There's a difference in philosophy at present and have existed for some time in countries that are more susceptible to balance of payments pressures, given the size, circumstance, relative risk profile and one can expect that that would persist. One of the challenges with moving to a system, central bank digital currencies is potentially that currency competition becomes much easier or much more fierce and the ability to shift becomes much more seamless. Therefore a greater pressure on those countries. So what you're seeing is a manifestation of that and trying to think about ways to limit those risks. There are mechanisms to do that. And those central banks will pursue those.

ED: You would be more liberal about allowing stablecoins into your ecosystem? Your central bank? 

MC: I mean, yes and no. That form of money is just prone to debasement in the fullness of time. The type of perspective you need to have as a central bank or an authority that's measured in decades, as opposed to a five-year-business plan, recognise that the only way to have at scale at the core of the system. I'm interpreting your question in terms of being at the core of the system, as opposed to being a native currency for some specific application, that I can see  for stablecoin.

At the core of the system, it's too much of a risk, and the only way to eliminate that risk is to back the stablecoin with the central bank balance sheet, one to one. So you have no gap, no maturity mismatch. But if you do that, why would you do that with a private stablecoin? You've given the public balance sheet away, so why wouldn't you just manage it yourself? And the answer is, you would manage it yourself.

ED: Well, that's what the central bank would want to do.  

MC: If I'm a central bank, it's my balance sheet. So the only person whose opinion matters in that conversation is the central bank.

ED: Having the same conversation with some of the crypto guys out there. They're out to tear down the central bank system. So not necessarily in the UK or somewhere. You now have stablecoins that are going into the billions of dollars and bitcoin going into a trillion dollars. So, these are sizable sums now, so it's just a question of at which time will there be a reapportionment or a recognition that they play a certain value. On top of that, some of these stablecoins, these have applications on them.

MC: I said a while ago about those applications, filling specific gaps in the payment system, you can see having a private currency filling that role. That is distinct from “tearing down” a central bank and being at the core of the system. That is not going to happen. So it's niche and it plays a role. But then you look at an asset and say, well, which of these crypto assets is actually transitioning towards playing that role as opposed to representing that it's going to play the central role of as the medium of exchange unit of account and store of value for a foreign economy? If you're gunning for that, well, good luck. 

ED: I'm totally neutral, appreciating that you want to maintain the core, it's how you allow the play for alternatives or supporting systems.

MC: I think there will be some, certainly will be allowed if it's a superior solution to specific payment applications.  

ED: I didn't realise that you had written a book, “Values”. The book that is very popular in China is Ray Dalio’s book “Principles” and this thing about single titles and espousing values. The big difference between your book and Ray Dalio’s book is his is from a perspective of an entrepreneur. He talks about work, his own personal background, where else you started with the rise of the market society and the crisis of values in the banking crisis then you personalised it in your third chapter. Tell me a little bit more about the book.  

Defining value 

MC: It's about the relationship between value and values. So values of society. What values do we need for the market to function effectively? We saw the challenges we have and I lived through them as a central banker in the global financial crisis when they can go wrong, but also what we were just talking about earlier, which is, if society values something like getting to net zero, addressing climate change, if that is something we value, then the most powerful mechanism to deliver that is the market. So value serves values and that dynamic is what's playing out. That's how you turn a major risk into a major opportunity. 

What we were touching on is how do we measure value? What gives money its value? What is the future of money? What's the history of money? Where has it gone? We talked about stablecoins earlier. The Bank of Amsterdam was a stablecoin for much of the 1600s until it succumbed to the temptation and start to lend, which is what happens with these circumstances. Then the core of the system fell apart. A private institution made those decisions. So the book looks at all of those aspects and then looks to apply it to how do I put that into action as a leader of an organisation? How do I do it as an investor? Similar to Ray. How do I do it if I'm running a business? What are the implications for running a country? What are the public policies? So it draws on the lessons of crises in the history of money and then applies them. Leader, company, investor country.

ED: When you talk about crisis of value, leaders have to make decisions that are counter to everything that's been told to them at that point in time. For us, the 1997 Asian financial crisis was a crisis of values. We had countries like Korea, Malaysia, Indonesia, Thailand, having to make important decisions and at that time, the prevailing values of the IMF and  the Western world order allowed your banks to fail and float your currency. It's the countries that went against that grain, were able to hold a sustainable level of their own economies and run that through, right that true. To what extent do you speak about the values of someone being able to stand up against conventional wisdom in a crisis?

MC: I would say that advice, which was wrong in most cases from the IMF and history has proven that out. Those were policies, not values. When you think about sustainability as a value, it's not just about environmental sustainability, we touched on this earlier. It's also economic sustainability. In other words, I can't solve climate change if I'm going to throw large parts of my population out of work. I need to determine the way to reduce my emissions and grow my economy that needs to be sustainable. I need in a financial crisis, a sense of solidarity. So the adjustment needs to be borne fairly across the economy in order for that to work. The gold standard, and I go through this in the book, part of the reason why the gold standard failed is that it put increasingly the weight of adjustment on workers in service of international stability. That was getting the balance wrong. But if you have a sense of your core values, values of sustainability, responsibility and a necessary respect for dynamism in the market, which is a value I believe is at the heart of all this, then you  see these issues more broadly and you're more likely to make the right decisions. That's why it's so essential. 

ED: I asked you why you wrote the book in that form of values rather than something about your job as a central banker. Because at the height of capitalism is consumption, it’s leverage. Do you take a shot at that? Do you say that capitalism is broken? 

MC: No, not at all. But well, first thing, why did I write it? It does draw on my experience. I'm G7 central bank governor during the global financial crisis, the Euro crisis, the Brexit crisis, the climate crisis, the COVID-19 crisis. I've been at the heart of a series of these and you draw lessons from experience. These are some of my lessons from experience. About how we get the balance right between the values that are necessary for the market to function and how we put the market  in service. But the market is incredibly powerful. 

I'm very much a believer in the market and has seen its power and always operated at the intersection of markets and public policy. So this is how you get the market to serve society and create tremendous value and economic opportunity for people along the way. The father of capitalism is often described as Adam Smith. People buy but don't read “The Wealth of Nations”. They remember “The Invisible Hand, it appears once in the book. What they don't buy is “The Theory of Moral Sentiments”, which is his greater work. And his whole point is that you need those moral sentiments, those values in order to support a well-functioning market. If you don't buy that book and understand it, then the first book is misread. It undercuts itself. That's the balance we have to get. I learned that through my experience as a governor and in the private sector, where I was before. So what I've tried to do is to distill that into some experiences and lessons. 

ED: But how far are you from Adam Smith in terms of the need for regulation, the need for government in a market environment?

MC: Markets are social conventions. They don't exist in a vacuum. They need some structure around markets, some of that is regulatory, some of that is the customs that are associated with those markets, which in that regard, I’m very much like Smith. That's exactly what Smith believes and experienced. He was very much a student of markets and understood different types of markets, including markets that didn't work well in his time.

ED: I look forward to reading the book and drawing from your personal experiences, as well as the lessons that you you're putting out on “Values”. Thank you very much for spending time with me and hope that we will be able to meet sometime. We will try to promote your book here in Asia and we'll make sure that it gets a good read. Thank you very much, Mark.

MC: Excellent. A real pleasure. I'm sure we will meet at some point. I look forward to being out there. And I'll see you in Singapore, hopefully.

Click here to purchase Mark Carney’s book "Value(s)".