Misunderstood necessities

Villains & tribalism! The master resource? Density, intermittency & liquidity.?

Payment evolution & energy transition. Strange bedfellows eh? The former pays the bills, whilst the latter I am increasingly intrigued by.

The idea behind this post has been brewing for almost a year now. What pushed this across the line was “gratitude“ for modern medicine (convalescing yesterday after a minor procedure) & picking up Jonathan Haidt again (“The Righteous Mind”).

At the risk of making connections where there aren’t any, I have noticed similarities in the energy transition and payments evolution debates, specifically around the demonisation of fossil fuels & correspondent banking.

FWIW, personal views only (in semi-groggy state when this was drafted), & not an apologist of either of the aforementioned topics. But do feel a dose of realism is needed… Why?

1) Misunderstood necessities

Environmental impacts? Yes. Opaque and unnecessarily complex at times? You bet.?

This doesn’t take away the fact that the modern physical world is built on the fossil fuel molecules, whilst correspondent banking facilitates global trade, likely in the several trillions daily.

They are not without controversy, but the works of Doomberg, M.Shellenberger & A.Epstein, to me at least, are very much grounded in the bio-physical realities of the world, and are worth a follow. I will make some specific recommendations in the comments.

I have reached this point, starting with a genuine concern on energy transition (and associated climate impact) as a parent, and quickly realised, just like politics, most people are operating in their own echo chambers. This is dangerous.

I am all for the green transition, and have put my money where my mouth is, in both public and private markets. But I noticed, perhaps best exemplified by the “Just Stop Oil” movement, some pretty odd behaviour. Ranging from a complete lack of understanding of the “impossibility” of a quick transition (not enough known copper, lithium, nickel reserves to meet many of the aggressive targets), to outright hypocrisy due to perverse incentives (burning wood due to govt loopholes), and obvious greenwashing.

To a lesser degree, I’ve seen bashing of correspondent banking & its death prematurely declared multiple times. In my day job, I see the pros & cons across all forms of payments (including domestic scheme interlinkages, alternative schemes, blockchain/CBDCs), and none of the “regulated” options are truly intermediary-free. Yes, maybe we can reduce some of the long-chains we see in today’s corr-bkg, but there will be new sets of intermediaries, as well as new risk and technology deployments.?

What did Sowell say about trade-offs again?

2) Intermittency, density & Liquidity

Almost failed physics and chemistry in high school. But the concepts of intermittency and density are pretty simple to comprehend. Some great resources out there. But in short: Intermittency refers to the unpredictable nature of solar & wind production, subject to natural forces, whilst density refers to amount of energy that can be stored in a system / module, typically measured in kilojoules or megajoules.?

In both respects, despite their offending properties, fossil fuels score highly, and the main point here really is to have a systems-mindset in considering what a transition looks like. No point claiming green points whilst facing a blackout/brownout when energy is needed most.

This is also where the comparison between corr-bkg and alternative networks kick in. A large challenge with scaling alternative networks remains liquidity. Liquidity is not free (one can argue about its scarcity given current events, but maybe that’s for another day). This is well-documented in various research papers by central banks and the BIS, and also explains why bilateral RTP linkages are often capped with smallish amounts. Works well for P2P and P2M (which is a good thing, don’t get me wrong), but will likely struggle to scale for B2B, especially when throwing in concerns about fraud.?

Thus, for all its faults, correspondent banking continues to play a pivotal role. We sometimes overlook the important roles that large intermediaries play when evaluating counterparty and credit risk. Oh, and obviously many alternative networks continue to rely on good old correspondent banking for settlement.

3) Balance

So what’s the point of the ramble? The energy transition will and should happen, just as the evolution (or revolution if you prefer) in payments will occur.?

As an unashamed centrist, I just feel we need to step away from our echo chambers and examine the facts more closely.

As a parent, I’ve had several conversations with the kids on the topic too. The younger one asked me (After learning about it in class) about buying an EV since it’s “great for the climate”, and then got a lesson on embodied carbon and the up to 9 year payback period vs an ICE. I did stress however that EVs are an important pathway towards even better battery development, but to look at things with eyes wide open.?

A great resource I have come across, and recommended to many, is the Energy Transition Crisis video series by Erik Townsend.

On the payments side of the fence, I think we are already seeing progress. Swift have reported their stats on the increasing % of txns hitting beneficiary banks within an hour, and the G20 report was just out too.

I think we will see an interesting mix. Perhaps some aspects of correspondent banking shifting to wCBDC settlement, but that will be a journey given many aspects within the realm of liquidity, legal & compliance, and whether central banks want to take on new dimensions is also up for discussion.

Back to my opening point on gratitude, let’s not overlook the good that current systems bring and underestimate the perils and challenges with any transition. Which is not to gloss over their many flaws, but rather plan for both their benefits and address their shortcomings in our future systems.?