## fd-september-2025

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### Technology-driven transformation of finance — overview and macro backdrop
- The issue frames a technology-driven transformation of finance where "technology, data, and changing societal values are reshaping how people and institutions move money and trade financial assets, who provides liquidity, and where new risks are brewing."
- Global growth projections (IMF’s July 2025 World Economic Outlook Update):
  - Global growth projected at 3.0 percent for 2025 and 3.1 percent in 2026.
  - Projections remain "about 0.2 percentage points below our pre‑April forecasts," reflecting trade tensions.
- Upside and downside factors:
  - Downside: potentially higher tariffs, elevated uncertainty, geopolitical tensions, and a "breakdown in trade talks, or renewed protectionism."
  - Upside: breakthroughs in trade negotiations and structural reforms could lift long-term productivity.

### Stablecoins: uses, vulnerabilities, and systemic implications
- Observed benefits:
  - Faster and cheaper cross-border payments; large-scale user adoption and 24/7 low-cost transactions.
- Key vulnerabilities and events:
  - Stablecoins are pegged to real-world currencies, usually the US dollar.
  - Issuers like Circle (USDC) and Tether (USDT) hold reserves in bank deposits, Treasury securities, and corporate bonds to maintain the peg.
  - March 2023: Circle’s USDC temporarily lost its peg after losing access to reserves.
  - 2022: Collapse of Terra’s algorithmic stablecoin triggered widespread losses.
  - Stablecoins lack deposit insurance and direct access to central bank support and "may function well in good times, but they can falter under stress."
- Macro and fiscal concerns:
  - The world’s two largest stablecoins have combined capitalization of more than $200 billion.
  - US dollar stablecoins and USDC already hold collectively more US Treasuries than Saudi Arabia (as shown in Chapter 2 of the IMF’s July 2025 External Sector Report).
  - Potential consequences if US dollar stablecoins scale globally:
    - Dollarization, capital flow volatility, exchange rate volatility, weakening of banking systems, money laundering, sanction evasion, fiscal base erosion, and privatization of seigniorage.
  - Possible offsetting benefits: quicker and cheaper cross-border payments, greater access to stable means of payment in weak-governance countries.
- Policy direction:
  - Develop clear regulation to protect consumers and investors and limit systemic spillovers.
  - Balance privacy and speed with enforcement against tax evasion, money laundering, and terrorism financing.
  - Ensure know‑your‑customer and anti–money laundering standards are enforced in crypto payment rails.

### Tokenization, programmability, and market-structure effects
- Mechanism and promise:
  - Tokenization creates assets on programmable ledgers enabling near-instant exchange of money and assets and automating roles such as registrars (payments like dividends or interest can be made directly to token holders).
  - J.P. Morgan estimates asset management costs could be cut by about a fifth if settlement of trades and reinvestment of sale proceeds were immediate.
- New risks from speed and programmability:
  - Faster automated trading increases likelihood and severity of market disruptions ("flash crashes"); example: in the 2010 Wall Street flash crash, an estimated $1 trillion was briefly wiped off the value of stocks listed on the exchange.
  - Chains of programs on ledgers can act like "a programmed set of falling dominoes during a crisis."
  - Tokenization can amplify debt creation because tokens can be used as collateral to borrow and invest elsewhere, increasing systemic vulnerability.
- Interoperability and fragmentation:
  - If token ledgers do not interoperate, the financial system could fragment into silos; interoperability "requires planning and coordination."
  - Policymakers want tokenized systems to "stay open, connected, and stable."

### Payments, fast payment systems, and national examples
- India’s Unified Payments Interface (UPI):
  - UPI interconnects hundreds of banks, platforms, and apps and carries out more than 19 billion transactions a month.
  - UPI launched: 2016.
  - UPI ecosystem: "more than 200 apps and most banks."
  - UPI concentration: "over 95 percent of UPI transactions are initiated using only three apps"; "in about half of them, both payer and payee use the same app."
  - 2016 banknote demonetization accelerated UPI adoption.
- Brazil’s Pix and other public fast payment systems:
  - More than 90 percent of Brazilian households and businesses have adopted Pix.
  - Fast public systems deliver faster, free, always-available payments and can process more daily transactions than cash, credit, and debit cards combined.
- Cross-border initiatives:
  - Indonesia’s QRIS established: 2019.
  - QRIS fees: free for transactions below 500,000 rupiah ($30); 0.3 percent for transactions above that threshold.
  - Singapore PayNow introduced: 2017.
  - PayNow–PromptPay linkage completion: 2021 (took three years of collaboration).
  - Nexus Global Payments (NGP) established: April 2025; expected first live Nexus transaction "around 2027."
  - Policy priorities: prioritize interoperability, open infrastructure, supporting enablers (digital ID, affordable mobile internet), monitor concentration and switching costs, and coordinate cross-border standards.

### Nonbanks, AI in lending, and changing liquidity provision
- Structural shifts:
  - Lightly regulated nonbanks and asset managers are providing more liquidity and mimicking deposit-like functions without deposit insurance or lender-of-last-resort access.
  - Lenders increasingly use AI and big data to speed loan approvals, reduce collateral requirements, and reach borrowers traditional banks often overlook.
- Risk assessment:
  - The global financial landscape has changed but "the rules remain largely unchanged," creating potential vulnerabilities.
- Macro-financial trade-offs of fast payments:
  - Fast payments force banks to hold more liquid assets for unpredictable outflows, reducing bank lending and increasing credit risk by narrowing the traditional banking model toward low-yielding liquid assets and yield-seeking behavior.
- Policy implication:
  - Forward-looking public policies must accompany radical innovation; close the regulatory perimeter to functions that have shifted outside banks and update liquidity backstops and market intervention tools.

### Cross-border capital flows, CBDCs, and currency network integrity
- Tokenization, CBDC interoperability, and capital flows:
  - Tokenization can reshape global capital flows by reducing frictions and improving access to foreign assets; interoperability of CBDCs could enable efficient cross-border transactions but requires international coordination.
  - Risks: tokenized systems could be used to circumvent KYC/AML if regulators lag; decentralization may threaten government revenue and seigniorage.
- Cybersecurity and "integrity privilege":
  - Post-quantum cryptography progress is uncertain; currency networks most exposed to hacking risk massive confidence crises and capital outflows.
  - A currency network with the smallest attack surface could harvest a premium—an "integrity privilege."

### Compliance-by-design for stablecoins and zkKYC framework
- Model overview:
  - Proposed KYC perimeter using zkKYC tokens (zero-knowledge KYC) to prove compliance on chain without revealing identities unless legal process triggers unmasking.
  - Smart contracts analyze encrypted info in zkKYC tokens; when a match with SAR criteria occurs, a SAR is generated automatically.
  - The model replaces manual reactive off‑chain reviews with proactive real‑time on‑chain algorithmic supervision.
- Implementation elements:
  - Verifiable credentials issued by government agencies or authorized financial institutions are stored off-chain; zkKYC tokens prove compliance on-chain.
  - Zero-knowledge proofs (ZKPs) enable selective disclosure (example: proving being over 18 without revealing exact age).
  - Governance and enforcement:
    - Credential issuers and smart contract operators must be licensed, transparent, and accountable.
    - Legal due process determines thresholds for unmasking (administrative subpoenas versus judicial warrants vary by jurisdiction).
    - Cross-border enforcement depends on international cooperation and interoperable standards.
- Technological and systemic challenges:
  - Significant computational burden and potential for false positives/negatives.
  - Privacy-preserving mechanisms may cause delays during peak periods.
  - Mitigations: licensed compliance-as-a-service providers, advances in applied cryptography, multiparty computation.
- Policy caveat:
  - Compliance-by-design "offers a promising path forward but is not a silver bullet" and mandating it globally is infeasible; blocking domestic access to alternative offshore stablecoin systems would be challenging.

### Fighting tech-fueled crime — scale, tools, and policy responses
- Recent enforcement example:
  - Department of Justice seizure in June: $225 million from crypto scams known as pig butchering.
- Illicit crypto statistics and trends:
  - Annual illicit crypto activity growth has averaged about 25 percent in recent years.
  - Illicit crypto activity may have surpassed $51 billion last year (Chainalysis).
- Criminal techniques:
  - Social engineering (romance/investment scams), AI-generated profiles, encrypted messaging, decentralized exchanges, mixers, stablecoins for hiding proceeds, AI-generated identities and deepfakes.
- Challenges for authorities:
  - Jurisdictional limits, legacy systems, underresourced agencies, and delays in implementing global standards (for example, FATF’s "travel rule").
- Constructive responses:
  - Invest in regulatory technology (AI transaction monitoring, blockchain analysis), hire data scientists and financial crime specialists, bring virtual assets under AML/CFT regulation, foster public-private partnerships, back FATF and FSB standards with national investments.
- Policy urgency:
  - "Governments can’t wait. The criminals won’t."

### Multilateralism, current-account imbalances, and policy prescriptions
- Nature of multilateral challenge:
  - Multilateralism is an expensive global public good with uneven cost distribution; support must be incentive compatible and deliver visible gains.
- Three pathways to sustain cooperation:
  - Inadvertent cooperation: competitive actions producing positive spillovers (vaccine development, energy transition subsidies).
  - Overcoming prisoners’ dilemma (nudging): smaller nations nudging larger ones to act collectively to reduce individual fears of losing out.
  - Pathfinder multilateralism: subgroups ("pathfinders") and inclusive submultilaterals (examples: WTO MPIA, RCEP).
- External sector snapshot (selected country current-account balances, percent of GDP, as presented for 2022, 2023, 2024):
  - SINGAPORE: 18.4 17.7 17.5
  - HONG KONG SAR: 10.2 8.5 12.9
  - GERMANY: 3.8 5.6 5.7
  - KOREA: 1.4 1.8 5.3
  - SPAIN: 0.4 2.7 3.0
  - UNITED STATES: -3.9 -3.3
  - THE NETHERLANDS: 6.6 9.9 9.9
  - SWEDEN: 4.7 7.0 7.4
  - SWITZERLAND: 8.7 5.2 5.1
  - JAPAN: 2.1 3.8 4.8
  - ITALY: -1.7 0.1 1.1
  - FRANCE: -1.2 -1.0 0.4
  - CANADA: -0.3 -0.6 -0.5
  - BELGIUM: -1.3 -0.7 -0.9
  - UNITED KINGDOM: -2.1 -3.5 -2.7
  - AUSTRALIA: 0.4 -0.3 -1.9
  - RUSSIA: 10.4 2.4 2.9
  - CHINA: 2.4 1.4 2.3
  - THAILAND: -3.5 1.4 2.1
  - SOUTH AFRICA: -0.5 -1.6 -0.6
  - TÜRKIYE: -5.1 -3.5 -0.8
  - INDIA: -2.0 -0.7 -0.8
  - INDONESIA: 1.0 -0.1 -0.6
  - BRAZIL: -2.2 -1.3 -2.8
  - MALAYSIA: 3.2 1.5 1.4
  - MEXICO: -1.2 -0.3 -0.3
  - POLAND: -2.3 1.8 0.2
  - SAUDI ARABIA: 12.1 2.9 -0.5
  - ARGENTINA: -0.6 -3.4 -3.9
- External-balance diagnosis and prescriptions:
  - Global current account balances fell to 3 percent of world GDP in 2023, widened to 3.6 percent in 2024.
  - Deficit countries: curb excess spending and improve competitiveness.
  - Surplus countries: boost domestic demand and investment.
  - Gradual, concerted domestic adjustments recommended to shrink imbalances and foster resilient global growth.

### Innovation, AI, entrepreneurship, and policy for decentralized experimentation
- Limits of centralization and scale:
  - LLMs grew 10,000‑fold in scale between 2019 and 2024 yet still scored about 5 percent on the ARC reasoning benchmark; program search topped 20 percent on the same benchmark.
  - Breakthroughs require exploration, decentralized experimentation, and embodied knowledge.
- Concentration and market structure:
  - Microsoft’s alliance with OpenAI controls about 70 percent of the commercial LLM market.
  - Nvidia provides about 92 percent of the specialized GPUs used to train these models.
- US entrepreneurial geography and data-center investments (figures preserved exactly as presented):
  - JPMorgan Chase and Starwood Property Trust have committed $2 billion for a 100-acre data center development in West Jordan, Utah.
  - JPMorgan Chase made a loan of $2.3 billion in January 2025 for a facility in Abilene, Texas.
  - Meta plans to build an $800 million, 715,000-square-foot data center in Cheyenne, Wyoming.
  - Amazon is building two data centers in Madison County, Mississippi, for a total cost of $10 billion.
  - Google is building a $2 billion center in Fort Wayne, Indiana, and a $1 billion center in Virginia.
- Start-up and labor patterns:
  - PitchBook: AI start-ups accounted for 22 percent of first-time venture capital financing in 2024.
  - Business formation: number of applications to register a new business in the US is about 50 percent higher than before the pandemic (2010–25 reference).
  - Young, high-growth start-ups accounted for less than 6 percent of employment in 2024, compared with almost 10 percent in 1985.
- Policy implications:
  - Preserve competitive arenas, lower barriers to entry, support decentralized experimentation, invest in infrastructure and education, and address local resource needs (cheap energy, supportive regulations) where data‑center clusters emerge.

### Measures of uncertainty — discrepancies and economic impact
- Measurement approaches:
  - Textual: Economic Policy Uncertainty (EPU) Index; World Uncertainty Index (WUI).
  - Market-based: VIX (Chicago Board Options Exchange), MOVE Index.
  - Survey-based: US Survey of Business Uncertainty (SBU); UK Decision Maker Panel (DMP).
- Recent readings:
  - 2025: EPU reached a record high; WUI shows similar trajectory.
  - VIX was elevated in 2025, reaching 32 in April.
  - SBU doubled during January–May 2020 but through June 2025 showed no surge comparable to text measures; SBU forecasts rose after the November 2024 election and declined in spring 2025 after tariff wars began.
  - Puzzle: Text measures surged in 2025 while market measures rose moderately and survey measures remained largely flat through June 2025.
- Economic mechanisms and timing:
  - Real-options channel: higher uncertainty raises the option value of waiting, reducing irreversible investment and hiring.
  - Consumption channel: postponement of durable purchases.
  - Financial-cost channel: higher risk premia and borrowing costs.
  - Timing: effects typically take 6 to 18 months to slow growth; impacts likely through 2025 and 2026.
- Authors’ assessment:
  - Uncertainty is not as high as text measures imply but has risen above long-term levels; the rise is expected to slow growth via investment, hiring, and durable consumption but is "not large enough to induce a global recession."

### Frontiers and governance: competition, compliance-by-design, and fragmentation risks
- Fragmentation risks:
  - Multiple private issuance networks and tokenization platforms could fracture the monetary system if private issuers gain market share.
  - Private monies historically unstable without sovereign backing; sovereign credibility is central to stability.
- Compliance-by-design and privacy trade-offs:
  - Compliance-by-design architectures (zkKYC, ZKPs, smart-contract SAR generation) aim to reconcile privacy and AML/CFT enforcement.
  - Key risks: computational cost, false positives, governance quality dependent on weakest credential issuer, and cross-border legal differences in due process.
- Policy priorities across sections:
  - Close the regulatory perimeter for payments, credit, and liquidity activities outside banks.
  - Strengthen data collection and measurement of crypto capital flows, stablecoin use, and tokenization dynamics.
  - Update liquidity backstops and market-intervention tools to match faster plumbing of capital flows.
  - Coordinate internationally on tokenization standards, CBDC interoperability, and cyber-resilience.
  - Consider implications for seigniorage, fiscal bases, and distributional consequences of privatized global money issuance.

### Additional notable facts and statistics
- Department of Justice crypto seizure: $225 million (June).
- Illicit crypto activity estimate: may have surpassed $51 billion last year.
- Annual illicit crypto activity growth: averaged about 25 percent in recent years.
- UPI transaction volume: "more than 19 billion transactions every month."
- Nexus Global Payments (NGP) established: April 2025; first live Nexus transaction expected "around 2027."
- Selected national data-center and investment announcements preserved as above (see data-center bullet list in Innovation section).

_italics: Source — fd-september-2025 (fd-september-2025 PDF content provided)._

### Section 1

### fd-september-2025 - Section 1

### Overview
- The issue frames a technology-driven transformation of finance where "technology, data, and changing societal values are reshaping how people and institutions move money and trade financial assets, who provides liquidity, and where new risks are brewing."
- Key topics in this section include stablecoins, tokenization, digital payments (including India’s Unified Payments Interface), fintech and big tech entrants, AI in lending, and the macroeconomic backdrop including trade tensions.

### Macro outlook and trade tensions
- Global growth is projected at 3.0 percent for 2025 and 3.1 percent in 2026 (IMF’s July 2025 World Economic Outlook Update).
- Projections remain "about 0.2 percentage points below our pre-April forecasts," reflecting trade tensions.
- Upside and downside factors noted:
  - Downside: potentially higher tariffs, elevated uncertainty, geopolitical tensions, and a "breakdown in trade talks, or renewed protectionism."
  - Upside: breakthroughs in trade negotiations and structural reforms could lift long-term productivity.

### Stablecoins and systemic implications
- Observed benefits:
  - Faster and cheaper cross-border payments.
  - Large-scale user adoption and 24/7 low-cost transactions noted for stablecoin platforms.
- Observed risks and concerns:
  - Potential for dollarization, capital flow volatility, and exchange rate volatility tied to widespread adoption of US dollar–denominated stablecoins.
  - Potential weakening of the banking system.
  - Money laundering and other financial crimes.
  - Stability under stress: "Stablecoins may function well in good times, but they can falter under stress."
- Policy direction highlighted:
  - Clear regulation that protects consumers and investors and limits spillovers is necessary.
  - Balance privacy and speed with the need to stop tax evasion, money laundering, and terrorism financing.

### Financial market change: nonbanks, AI, and liquidity
- Structural shifts:
  - Lightly regulated nonbanks are providing more liquidity.
  - Lenders increasingly use AI and big data to speed loan approvals, reduce collateral requirements, and reach borrowers traditional banks often overlook.
- Risk assessment:
  - The global financial landscape has changed but "the rules remain largely unchanged," creating potential vulnerabilities.
- Policy implication:
  - Forward-looking public policies must accompany radical innovation to achieve beneficial outcomes.

### Tokenization, programmability, and market structure
- Mechanism and promise:
  - Tokenization creates assets on a programmable ledger, enabling near-instant exchange of money and assets and automating roles such as registrars (payments like dividends or interest can be made directly to token holders).
  - Tokenization reduces frictions in transferring assets between brokers and can spur competition among intermediaries.
- Interoperability and fragmentation risk:
  - If different token ledgers do not interoperate, the financial system could fragment into silos; interoperability "requires planning and coordination."
  - Policymakers want tokenized systems to "stay open, connected, and stable."
- New risks from speed and programmability:
  - Faster, automated trading increases likelihood and severity of market disruptions ("flash crashes"); example cited: in the 2010 Wall Street flash crash, an estimated $1 trillion was briefly wiped off the value of stocks listed on the exchange.
  - Chains of programs on ledgers can act like "a programmed set of falling dominoes during a crisis."
  - Tokenization and programmability make it easier to create complex financial products, with risks that regulators may not fully understand until too late.
- Efficiency gains estimate:
  - J.P. Morgan estimates that asset management costs could be cut by about a fifth if settlement of trades and reinvestment of sale proceeds were immediate.

### Cross-border payments and national examples
- India’s Unified Payments Interface (UPI) highlighted as a public-sector response to consumer demand for fast, efficient payments:
  - UPI interconnects hundreds of banks, platforms, and apps and carries out more than 19 billion transactions a month.

### Policy recommendations and priorities (as presented)
- Develop clear regulation to protect consumers and investors and limit systemic spillovers from new financial technologies.
- Ensure interoperability of tokenized systems to avoid fragmentation and preserve competition.
- Balance privacy and efficiency in payment systems with robust anti–money laundering and counter–terrorist financing measures.
- Adopt forward-looking public policies to guide competition among fintechs, big techs, incumbents, and nonbanks.
- Monitor and update regulatory frameworks to reflect structural changes (nonbank liquidity provision, AI-driven credit decisions, and programmable financial products).

*Source: fd-september-2025 - Section 1*

### Section 2

### fd-september-2025 - Section 2

### Tokenization: complexity, debt amplification, and systemic risk
- Finding: Nonprogrammable assets that soured during the 2008–09 crisis contributed to a “complexity bubble” that burst alongside the real estate bubble: “The securities almost no one understood, backed by mortgages no lender would have signed 20 years earlier, were the first dominoes to fall in the financial sector.”
- Finding: Programmability adds to an already complex financial landscape and makes it harder for regulators to keep tabs on potential risks.
- Finding: Debt amplifies shocks because it implies a promise to repay; tokenization can make it easier to build up debt because investors or institutions can use tokens as collateral to borrow and then invest that money elsewhere.
- Systemic risk channel: If one part fails (for example, “if a token loses value”), it could trigger losses across the system.
- Policy implication: Digital tokens “should be handled with care.”

### Hybrid technology and nonfinancial asset tokenization
- Finding: Financial assets evolved from paper records to digital ledgers and programmable tokens; the trend is expanding to nonfinancial assets such as real estate and potentially agricultural collateral like farmland and livestock.
- Finding: Physical assets cannot be fully digitalized—they still require physical care (example: “a farmer tends to a herd of cattle or the pasture where they graze”).
- Concept: Tokenization of nonfinancial assets is best seen as a hybrid between physical and financial technology.
- Observation: Innovations offer rewards by “speeding transactions and making trading cheaper,” but also add “speed, complexity, and risky debt,” factors that have contributed to previous financial crises.

*This article draws on an IMF Fintech Note, “Tokenization and Financial Market Inefficiencies.”*

### Why Europe Needs a Digital Euro — motivation and overview
- Motivation: Ensure that people in a digital world retain the option to make or receive payments in central bank money; “to ensure that people in a digital world retain the option to make or receive payments in central bank money.”
- Institutional premise: Supplementing physical cash with digital cash will support modernization of the traditional two-tier monetary system that allows both cash and bank deposits as a medium of exchange.
- Historical context: “The evolution of the two-tier monetary system over the past 300 years has provided a strong foundation for the operation of the broader financial system and has enabled central banks to deliver price stability effectively.”
- Policy stance: Prudence suggests preserving the retail role of central bank money, “including through the introduction of a digital euro.”
- Tail-risk focus: Central banks have a mandate to safeguard monetary stability in all circumstances; a digital euro “will minimize the likelihood of adverse economic outcomes in the future and ensure the resilience of the monetary system in an increasingly digital world.”
- Operational concern: If digitalization makes convertibility to physical cash lose relevance, not offering a digital cash option may threaten stability: “it’s not obvious that the two-tier monetary system would necessarily remain stable if ongoing digitalization meant that convertibility to physical cash lost relevance and a digital cash option was not made available.”

### Monopoly power, privacy, and operational design
- Finding: Payment instruments exhibit strong network externalities; using central bank money for payments limits scope for commercial payment systems to exploit monopoly power by charging excessive fees.
- Benefit: A digital euro can limit the potential monopoly power of firms at the center of private payment networks as digital transactions increase.
- Resilience role: Public access to central bank money provides a reliable fallback if commercial banking faces disruption (technical problems or a cyberattack); this motivates policymakers’ desire for a digital euro to work offline as well as online.
- Alternative critique: Stablecoins expand the private money universe and are not intrinsic substitutes for central bank money; “A stable value of a stablecoin in terms of currency is not intrinsic (unlike a liability of the central bank).”
- Design features: Appropriately calibrated limits on digital euro holdings can provide sufficient digital cash for transactions while preventing excessive outflows from commercial banks and outsize expansion of the central bank balance sheet.
- Privacy design claim: Since people will set up digital euro accounts primarily via their banks or other payment service providers, “If banks and other payment service providers carry out the necessary know-your-customer checks, maximum privacy will be maintained, and the central bank will not be privy to individual account details.”

### Unifying fragmented markets and fostering fintech innovation
- Finding: The euro area payment system is highly fragmented along national lines; customers typically rely on non-European card or e-wallet providers for cross-area payments.
- Mechanism: Mandating acceptance of a digital euro would create instant network effects to help unify the fragmented market.
- Merchant and consumer benefits:
  - Reduce costs for merchants and businesses by providing network infrastructure for an area-wide payment system on a not-for-profit basis.
  - Increase bargaining power vis-à-vis international card networks for in-person transactions and e-commerce.
  - Enable an area-wide fast payment system at the point of interaction (POI).
- Innovation: A standardized, pan-European platform would allow private providers to innovate while benefiting from economies of scale of the digital euro network, lowering costs for consumers and businesses.
- Competitive effect: Separating the basic plumbing (digital euro rails) from add-on services lowers the risk of lock-in effects by private payment networks.

### Digital euro as a symbol of sovereignty and unity
- Finding: A retail role for central bank money maintains the direct monetary relationship between the sovereign and the citizen and reinforces understanding that monetary stability is intrinsic to sovereignty.
- European context: The monetary role of the sovereign is relevant in the euro area, where the common currency “is seen as a critical mechanism for greater economic and political integration among member countries.”
- Political-cultural role: Beyond economic and monetary functions, “the euro is an important symbol of European unity. This must be maintained in a digital age.”

*Philip R. Lane is chief economist and a member of the executive board of the European Central Bank.*

### Trade policy beyond tariffs — visibility versus underlying interventions
- Thesis: Tariffs are visible and politicized, but focusing on tariffs obscures “the more fundamental mechanisms by which countries shape their trade relationships with the world.”
- Mechanism: A country’s internal imbalances between consumption and production must be consistent with its external imbalances; anything affecting internal imbalances affects external imbalances.
- Visibility point: Tariffs are “easy to identify, easy to weaponize, easy to reverse, and very obviously linked to trade,” which explains their political salience but makes them a poor proxy for trade policy as a whole.

### Income transfers and the broader instruments of trade intervention
- Core mechanism: A tariff shifts income from consumers to producers by making foreign goods more expensive; this reduces the household share of GDP and reduces overall consumption relative to production.
- Generalization: “The shifting of income from consumers to producers is the essence of trade intervention.” The same result can be achieved by tariffs, tax subsidies, or wage-suppressing labor laws.
- Consequence: Policies that suppress consumption relative to production tend to raise net exports; conversely, policies shifting income to consumers tend to lower net exports.

### Currency policy, financial repression, and other implicit tools
- Currency policy: Intervening to keep a currency undervalued mimics tariffs by making imports more expensive and exports cheaper, transferring income from net importers (households) to net exporters (tradable goods sector).
- Financial repression: Suppressing interest rates functions as a tax on net savers (households) and a credit subsidy for net borrowers (producers), creating domestic imbalances that show up as higher net exports.
- Tax/regulatory policy and strategic subsidies: Direct or indirect subsidies to strategic industries, tailored infrastructure for manufacturing clusters, or regulatory choices can change incentives in ways that mirror protectionism without breaching trade rules.
- Labor/institutional effects: Labor market structures and social institutions (example: the hukou system) can depress wages and reduce household consumption, producing export-oriented imbalances.

### Implicit intervention and policy implications
- Finding: When governments favor investment over consumption or capital over labor, they engage implicitly in trade intervention whether intended or not.
- International implication: Surplus countries’ domestic policies that prioritize producers over consumers create mirror effects in deficit countries that prioritize consumers over producers.
- Normative claim: A narrow focus on tariffs is misleading and counterproductive; addressing trade imbalances requires looking inward at how economies allocate income.
- Policy recommendation: Fixing trade imbalances “requires a change in how countries structure their economies. It requires power and resources to shift toward those whose spending drives sustainable demand.”

*Michael Pettis is a senior associate at the Carnegie Endowment for International Peace and a lecturer at Peking University.*

*Source: fd-september-2025 - Section 2*

### Section 3

### Multilateralism Can Survive the Loss of Consensus

### Multilateralism today: nature of the challenge
- Multilateralism is splintering today not because of geopolitical competition alone but because it is an expensive global public good that benefits all humanity while distributing costs unevenly across nations.
- Even when geopolitical rivals are polarized, they can agree on common goals (for example, preserving a hospitable planet, controlling pandemics, and restoring global economic prosperity) while disagreeing on methods or accusing others of free riding.
- Carbon accumulation and climate policy pose allocation questions: "How should we divide the burden of tackling climate change between past and present emitters?"
- Providing financial stability and restoring global growth raises similar allocation and free-rider problems: advanced economies may expend considerable resources while others fail to behave prudently.
- Policy implication: Support for multilateralism must align with self-interest—actions must be incentive compatible and deliver visible gains for everyone.

### Role of middle powers and the limits of power-size logic
- Small poor economies lack resources to provide costly global public goods (for example, patrolling seas or pumping trillions into the world economy).
- Middle powers—those with sufficient economic and financial firepower—may take on roles traditionally played by great powers.
- Example: The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) emerged after the United States failed to ratify the Trans-Pacific Partnership; it includes the United Kingdom despite not being a Pacific nation.
- Middle powers can provide global public goods more easily than small states, but they are susceptible to the same incentive erosion as great powers; they will not uphold multilateralism if they see no net benefit.
- Policy implication: Incentive compatibility must replace the idea that size alone ensures leadership; durable multilateralism requires broad, visible benefits for contributing nations.

### Three pathways to sustain international cooperation (analysis and recommendations)
- Core prescription: If the international system is to endure, it must have more than just great- or middle-power leadership; it must create incentive-compatible arrangements that yield visible gains for all participants.

- Inadvertent cooperation
  - Concept: Countries cooperate even when they disagree or act for the "wrong" reasons—doing the right thing for the wrong reason.
  - Mechanisms: Positive spillover benefits from competition and technological diffusion.
  - Examples:
    - COVID vaccines: Faster vaccine development was enabled by mRNA technology and competition among companies in different countries; competition built on others’ discoveries and produced vaccines that benefited everyone.
    - Energy transition: A country that responds to a rival’s perceived unfair subsidies for electric vehicles by subsidizing its own production increases global supply of affordable clean vehicles and reduces carbon emissions—benefiting all even though actions were motivated by rivalry.
  - Policy recommendation: Seek opportunities where competitive actions create positive global spillovers and implicitly align incentives without formal consensus.

- Overcoming the prisoners’ dilemma (nudging)
  - Concept: When countries acting in pure self-interest create a prisoners’ dilemma that is collectively destructive, smaller nations can nudge the system toward a collectively preferred outcome.
  - Mechanism: Persuade great and advanced economies to act as a group so individual fears of losing out are mitigated.
  - Example: Advanced economies resist granting emerging economies greater market access, creating barriers that limit developing-country growth and increase migration pressures. If advanced economies coordinate to liberalize, imports are spread across them and rising incomes in developing economies reduce migration incentives.
  - Policy recommendation: Use targeted nudges—especially by smaller nations—to change the strategic incentives of larger actors and unlock cooperative outcomes.

- Pathfinder multilateralism
  - Concept: When broad multilateral consensus collapses, subgroups of like-minded countries ("pathfinders") can form coalitions to preserve and advance rules-based cooperation.
  - Mechanisms and examples:
    - WTO MPIA (Multi-Party Interim Appeal Arbitration Arrangement): Provides an independent appeals process when the WTO appellate body cannot function; MPIA membership has tripled to more than 50 nations since 2020.
    - Regional Comprehensive Economic Partnership (RCEP): A 15-nation free trade agreement committed to rules-based order that includes ASEAN members plus Australia, China, Japan, New Zealand, and South Korea.
  - Policy recommendation: Promote inclusive submultilaterals and pragmatic coalitions that can sustain key functions of the international system even without universal consensus.

### External snapshot: widening global current account balances (findings and policy prescriptions)
- Key facts:
  - Global current account balances fell to a postpandemic low of 3 percent of world GDP in 2023, but widened to 3.6 percent in 2024.
  - Adjusting for pandemic volatility and Russia’s war in Ukraine reveals a notable reversal of the narrowing trend since the global financial crisis, possibly signaling a significant structural shift.
- Risks and diagnostics:
  - Large, persistent imbalances can signal vulnerabilities (for example, mismatches between saving and investment) and make economies more exposed to shocks.
  - The IMF’s external assessment shows current account balances were out of line with fundamentals in several major economies in 2024.
  - History shows global imbalances can unwind abruptly and painfully; to avoid such scenarios, gradual correction through concerted domestic macroeconomic policies is needed.
- Policy recommendations:
  - Deficit countries should curb excess spending and improve competitiveness to narrow external gaps.
  - Surplus countries should boost domestic demand and investment to better absorb output.
  - Gradual, concerted domestic adjustments would shrink imbalances and foster more balanced, resilient global growth.
- Selected country current account balances (percent of GDP), as presented for 2022, 2023, 2024:
  - SINGAPORE: 18.4 17.7 17.5
  - HONG KONG SAR: 10.2 8.5 12.9
  - GERMANY: 3.8 5.6 5.7
  - KOREA: 1.4 1.8 5.3
  - SPAIN: 0.4 2.7 3.0
  - UNITED STATES: -3.9 -3.3
  - THE NETHERLANDS: 6.6 9.9 9.9
  - SWEDEN: 4.7 7.0 7.4
  - SWITZERLAND: 8.7 5.2 5.1
  - JAPAN: 2.1 3.8 4.8
  - ITALY: -1.7 0.1 1.1
  - FRANCE: -1.2 -1.0 0.4
  - CANADA: -0.3 -0.6 -0.5
  - BELGIUM: -1.3 -0.7 -0.9
  - UNITED KINGDOM: -2.1 -3.5 -2.7
  - AUSTRALIA: 0.4 -0.3 -1.9
  - RUSSIA: 10.4 2.4 2.9
  - CHINA: 2.4 1.4 2.3
  - THAILAND: -3.5 1.4 2.1
  - SOUTH AFRICA: -0.5 -1.6 -0.6
  - TÜRKIYE: -5.1 -3.5 -0.8
  - INDIA: -2.0 -0.7 -0.8
  - INDONESIA: 1.0 -0.1 -0.6
  - BRAZIL: -2.2 -1.3 -2.8
  - MALAYSIA: 3.2 1.5 1.4
  - MEXICO: -1.2 -0.3 -0.3
  - POLAND: -2.3 1.8 0.2
  - SAUDI ARABIA: 12.1 2.9 -0.5
  - ARGENTINA: -0.6 -3.4 -3.9
- Additional diagnostic summary:
  - External sector assessments classify economies as "Stronger than implied by fundamentals", "Broadly in line with fundamentals", or "Weaker than implied by fundamentals", with several major economies identified as out of line in 2024.

*Source: fd-september-2025 - Section 3; https://www.imf.org/-/media/files/publications/fandd/article/2025/09/fd-september-2025.pdf*

### Section 4

### fd-september-2025 - Section 4

### Stablecoins: structure, uses, and vulnerabilities
- Stablecoins are pegged to real-world currencies, usually the US dollar.
- Issuers like Circle (USDC) and Tether (USDT) hold reserves in bank deposits, Treasury securities, and corporate bonds to maintain that peg.
- Stablecoins have shown promise as a cheap and borderless payment alternative and have become lifelines in Argentina, Türkiye, and Venezuela.
- More than 90 percent of Brazilian households and businesses have adopted a fast payment system (Pix), illustrating demand for rapid inclusive payments similar to some crypto promises.
- Use cases:
  - On- and off-ramps to crypto assets (vehicles for speculative investments).
  - Cross-border payment instrument, useful where domestic financial systems are weak or costly or where transactions are regulated (capital controls or externally imposed sanctions).
  - Saving, remittances, and settling transactions in economies with high inflation.
- Key vulnerabilities and events:
  - Stablecoins lack traditional safeguards such as deposit insurance and direct access to central bank support.
  - March 2023: Circle’s USDC temporarily lost its peg after losing access to reserves.
  - 2022 (the previous year): Collapse of Terra’s algorithmic stablecoin triggered widespread losses.
  - Research (Ma and Anthony Lee Zhang) highlights a core dilemma: the more stably they maintain prices, the more they resemble banks—yet they operate without deposit insurance or a lender of last resort, increasing run vulnerability.
- Systemic concerns:
  - Stablecoins may function well in good times but can falter under stress.
  - Increasing mainstream use as big banks and giant merchants contemplate issuing their own stablecoins raises questions about bank-like behavior without bank safeguards.
  - Almost all stablecoins are pegged to the US dollar, but most transactions happen outside the United States.
  - Stablecoins typically do not, so far, offer an interest payment.

### Fast payment systems vs. crypto alternatives
- Government-sponsored fast payment systems (e.g., Brazil’s Pix, India’s Unified Payments Interface) deliver faster, more inclusive payments in a less disruptive way than many crypto alternatives.
- Advantages of public fast payment systems:
  - Faster, free, always available, and can process more daily transactions than cash, credit, and debit cards combined.
  - Deliver what crypto promised—faster, more inclusive payments—without the same level of disruption.
- Trade-offs and macro effects (research with Ding Ding, Rodrigo Gonzalez, Yiming Ma):
  - Fast payment systems force banks to hold more liquid assets to meet unpredictable outflows.
  - Effects include reduced bank lending and increased credit risk.
  - Mechanism: convenience to consumers delays and reduces netting of payment flows for banks, increasing banks’ holdings of liquid low-yielding assets (cash and government bonds) instead of illiquid loans, which in turn exacerbates yield-seeking incentives and riskier lending.
  - Result: payment systems become faster, yet the banking model may become narrower and potentially riskier.

### Macro-financial implications and fragmentation
- The financial system is more fragmented: payments, credit, and liquidity have shifted outside the regulatory perimeter to mutual funds, ETFs, stablecoins, robots, and platforms.
- Nonbank actors mimic deposits and extend credit without deposit insurance, lender-of-last-resort access, or systemic oversight.
- Geoeconomic rivalries increase the possibility of a more fragmented financial system, posing challenges to global regulatory coordination.
- Capital flows have accelerated through real-time trading, credit-data loops, and fast payments, amplifying shocks; what once took days now happens in minutes, while tools for absorbing stress (liquidity backstops, market interventions) lag.
- Policy tool misalignment:
  - Central bank frameworks built for bank-dominated systems may be less effective when money resides with asset managers, on-chain transactions, or apps.
  - Traditional barometers and lender-of-last-resort mechanisms are less able to see or calm risks living outside banks.

### Stablecoins, dollar dominance, and seigniorage
- The world’s two largest stablecoins have combined capitalization of more than $200 billion.
- US dollar stablecoins inherit characteristics of the dollar: network externalities, credibility, and potential to be an important medium of exchange worldwide.
- Potential macro and fiscal consequences if US dollar stablecoins scale globally:
  - Dollarization and its side effects.
  - Financial stability risks and potential hollowing out of the banking system.
  - Currency competition and instability.
  - Money laundering and easier evasion of sanctions.
  - Fiscal base erosion and privatization of seigniorage, with wealth accumulation by a few companies/individuals due to network externalities.
  - Increased lobbying for deregulation and opacity of international capital flows.
- Possible offsetting benefits:
  - Quicker and cheaper cross-border payments (important for remittances).
  - Greater access to stable and convenient means of payment and store of value for citizens of countries with poor governance.
- Quantitative and balance-sheet effects:
  - US dollar stablecoins and USDC already hold collectively more US Treasuries than Saudi Arabia (as shown in Chapter 2 of the IMF’s July 2025 External Sector Report).
  - By increasing demand for Treasuries and the stock of US external safe liabilities, US dollar stablecoins could reinforce the “world banker” balance sheet of the United States and help stabilize US finances and external deficits, constituting a digital pillar strengthening the exorbitant privilege of the US dollar.
- Distributional and political economy effects:
  - Privatization of seigniorage implies significant wealth accumulation for dominant private issuers and greater political pressure to influence regulation.

### Tokenization, CBDCs, and capital flows
- Tokenization: recording claims on existing assets—or native digital assets—on a programmable platform where they can be transferred.
- Potential benefits of tokenization:
  - Integrate messaging, reconciliation, and asset transfer on a unified ledger.
  - Enable programmability and enlarge feasible policy tools.
  - Reshape global capital flows if private and official actors use the same platform.
  - Improve access to foreign assets by reducing frictions (capital controls, inefficient cross-border payments).
  - Decentralized finance (DeFi) platforms could expand peer-to-peer transactions and cut out intermediaries (banks, brokers).
- Risks and uncertainties:
  - Threaten government revenues and lead to a return to private money issuers competing for seigniorage, fragmenting and destabilizing the international financial system.
  - Tokenized systems could be used to circumvent know-your-customer and anti–money laundering compliance if regulators do not catch up.
  - Interoperability and linking of different countries’ CBDCs could enable efficient cross-border transactions but require coordination.
  - Data collection on crypto capital flows is still nascent; measuring flows, use, and global regulation is a policy priority.

### Cybersecurity, integrity privilege, and currency networks
- Post-quantum cryptography development is progressing but outcomes are uncertain given the race for computing power.
- Currency networks most exposed to hacking and losing integrity will face massive confidence crises and capital outflows, potentially spurring financial crises.
- A currency network with the smallest attack surface for hackers could harvest a premium and reduce financing costs—an “integrity privilege.”

### Policy implications and recommendations
- International policy cooperation is essential to manage major financial stability risks, exchange rate volatility, threats to public finances, currency competition, and political economy pressures from wealth transfers.
- Priorities for policymakers include:
  - Close the regulatory perimeter to address functions that have shifted outside banks (payments, credit, liquidity).
  - Strengthen data collection and measurement of crypto capital flows, stablecoin use, and tokenization dynamics.
  - Update liquidity backstops and market intervention tools to match faster plumbing of capital flows.
  - Ensure know-your-customer and anti–money laundering standards are enforced in crypto payment rails to limit illicit finance and sanction circumvention.
  - Consider implications for seigniorage, fiscal bases, and distributional consequences of privatized global money issuance.
  - Coordinate internationally on standards for tokenization, CBDC interoperability, and cyber-resilience to limit fragmentation and exploit network externalities for public good.

_italics: Source — fd-september-2025 - Section 4 (fd-september-2025 - Section 4)_

### Section 5

### Section 5 — Frontiers of Finance (fd-september-2025)

### Fragmentation risks in a multi-network monetary system
- Multiple connected private issuance networks and proliferating tokenization platforms could fracture the monetary and financial system if several private issuers gain market share.
- Private monies are historically unstable when not well regulated and not backed by a sovereign that can tax and enforce contracts; they often lead to runs.
- Sovereign currencies may be unstable if the credibility of institutions—particularly fiscal institutions—is questioned.
- International policy cooperation and regulation are essential to prevent excessive fragmentation and financial fragility.
- Integrity risks from data compromise could amplify instability:
  - The US Commerce Department’s National Institute of Standards and Technology warned in 2016 that quantum computers may soon solve problems conventional computers have trouble managing.
  - As emphasized by Fusa (2023), quantum advances will be able to break many of the public key cryptographic protections used today.

### Fintech, big tech, and banks: competition, cooperation, and public policy
- Digital innovation has produced fintech firms, large digital platforms offering payments and credit (big techs), crypto assets and stablecoins, and widespread adoption of artificial intelligence—challenging traditional intermediaries (Ben Naceur and others 2023).
- Digital innovations can both complement and substitute traditional financial services; often in the medium term they complement existing services, increasing competition and diversity.
- Payments serve as the gateway to broader financial services; new entrants typically start with payments and then expand into credit and other services.
- Examples of market developments:
  - Big tech credit expanded rapidly (Cornelli and others 2023), including merchant lending by Amazon in the US and Alibaba in China.
  - In Argentina, Mercado Pago supported small merchants excluded by banks.
  - In China, big tech credit has been less sensitive to home prices than bank credit.
  - In the US, fintech small business lenders targeted areas with high unemployment and bankruptcies.
  - Challengers like the UK’s Revolut and Brazil’s Nubank obtained licenses and became banks themselves.
- Public policy and public infrastructures played a central role in widening access and adoption:
  - Brazil’s central bank introduced Pix in November 2020; now over 90 percent of Brazilian adults use the service for daily retail payments and recurring payments.
  - India’s Unified Payments Interface (UPI)—operated by the National Payments Corporation of India and regulated by the central bank—promotes services by incumbent banks, fintechs, and big techs on one platform.
  - Other successful examples: Thailand’s PromptPay (privately run with a central bank role) and SINPE Móvil in Costa Rica (operated by the central bank).
- Fragmentation and “walled gardens” remain a problem where private fast payment systems are not interoperable:
  - In the US, Venmo users cannot pay Zelle-only users.
  - China has competing wallets by Alipay and WeChat Pay.
  - Peru has competing wallets Yape and Plin.
  - Policy intervention was needed in China and Peru to make payment systems interoperable.
- Policy takeaway: Radical ideas are necessary but not sufficient—public infrastructures, sound regulation, and coordinated public–private experimentation are needed to harness innovation and mitigate risks.
  - Project Agorá is an example bringing central banks and commercial banks together to explore a unified ledger to leverage tokenization for cross-border payments.

### Crypto, stablecoins, DeFi: functionality, risks, and monetary sovereignty
- Crypto and DeFi promised trust in code rather than institutions but remain heavily intermediated and often centralized due to exchanges, banks, and funds entering the market.
- Unbacked crypto assets are highly volatile and often have limited usability.
- Stablecoins tie value to fiat currencies; the largest stablecoins are issued by centralized entities holding assets such as US Treasury bills and bank deposits to back coins in circulation.
- Risks in the crypto sector include widespread fraud, scams, money laundering, and terrorism financing.
- Stablecoins “fall short of providing necessary elasticity in the monetary system.”
- More than 98 percent of stablecoins by value are tied to the US dollar, which can undermine monetary sovereignty in many jurisdictions.
- Functional promise: Programmability and tokenization could improve existing functions (for example, atomic settlement and enhanced collateral management) and enable new ones such as rewriting correspondent banking for cross-border payments—potentially laying the foundation for a tokenized financial system.

### Payments: fast systems, adoption, and inclusive outcomes
- Fast or instant payment systems have taken off in many countries, especially emerging markets; they allow real-time (or nearly real-time) transfers between end users (Frost and others 2024).
- Fast payments are provided by fintechs, big techs, and existing banks using smartphone apps and QR codes; they can operate on lower-tech phones.
- Successful public infrastructures combined with private innovation helped bring hundreds of millions of people into the financial system worldwide, improving consumer prices, efficiency, and inclusion.
- Chart evidence (described): The volume of fast payment transactions has grown rapidly, especially in emerging markets (Bank for International Settlements; CPMI Redbook statistics; Frost and others 2024; IMF; National Payments Corporation of India; World Bank; individual central banks).

### Compliance-by-design, privacy, and fighting financial crime in stablecoin systems
- The tradeoff between privacy and legal compliance is central for blockchain-based finance; stablecoin systems illustrate this tension but also offer a path to compromise via their programmable architecture.
- Compliance-by-design approach (Duffie, Olowookere, and Veneris 2025) aims to make decentralized stablecoin payment systems both private and enforce AML, CFT, and sanctions frameworks through embedded mechanisms that operate at transaction time (predefined criteria and risk indicators).
- Expected market split: Users valuing both compliance and confidentiality may choose compliance-by-design networks; others may continue with legacy pseudonymous approaches and looser compliance.
- Key technical elements of a compliance-by-design decentralized payment system:
  - Identity verification by licensed credential issuers places users within the KYC perimeter; verification stored on the payment-system ledger as a “hashed” (cryptographically masked) certificate.
  - Zero-knowledge proofs (ZKPs) let users prove eligibility to be inside the KYC perimeter without revealing personal data—enabling KYC compliance without exposure of identities or underlying information.
  - Smart contracts embedded in the ledger monitor transactions for red flags (unusual patterns, transfers exceeding thresholds, links to high-risk wallets).
  - When suspicious activity is detected, smart contracts generate suspicious activity reports (SARs) forwarded to regulatory authorities.
  - User identities remain masked unless specific risk indicators trigger legal processes (warrants or other legal process) to unmask underlying sensitive user data.
- Practical vision: “Smart-compliant” payment systems built into stablecoin blockchains could verify identities, review transactions via decentralized algorithms for suspicious activity, complete operations on-chain, and unmask identities only through legal process when flagged.

*Source: fd-september-2025 - Section 5, from the IMF/F&D PDF content provided.*

### Section 6

### Section 6

### Compliance-by-design for stablecoins: overview
- Maintaining confidentiality is strategically important and often a legal requirement; compliance involves know-your-customer (KYC) standards and monitoring of payments for illegal activity.
- Current practice: stablecoin providers delegate compliance tasks to centralized exchanges and other custodians that provide on-ramps and off-ramps for conversion between stablecoins and traditional currencies.
- Challenge: the ability to mint stablecoins and move them between multiple accounts with decentralized protocols, and the availability of “mixers” that obscure the trail of any single coin, makes it relatively easy to obscure transactions.
- Law enforcement has limited reach and is often reactive.
- Proposed model: a KYC perimeter in which zkKYC tokens (zero-knowledge KYC) are used to prove compliance on chain without revealing user identities or transaction details unless the user agrees or a SAR (suspicious activity report) is triggered and a legal basis for disclosure is established.
- Smart contracts analyze encrypted information contained in zkKYC tokens for matches with specified SAR criteria; when a match is found, the contract automatically generates a SAR, enabling enforcement while preserving privacy for compliant users.
- The framework replaces time-consuming “off-chain” manual reactive reviews with proactive real-time “on-chain” algorithmic supervision, leveraging smart contracts to apply compliance rules as transactions occur.

### Implementation: zkKYC and credential architecture
- zkKYCs combine zero-knowledge proofs with selective disclosure; example: a user can prove being over 18 without revealing age.
- A government agency or authorized financial institution issues a verifiable credential derived from official or government-issued identity documentation; a cryptographically protected version is stored in each user’s private digital wallet.
- During a transaction, a zkKYC token generated from this credential is embedded on-chain; the token proves KYC compliance while the underlying credentials remain securely off-chain with the credential issuer.
- For payments by natural persons (peer-to-peer or customer-to-business), identity spoofing can be mitigated by anchoring verifiable credentials to standardized legal documents such as passports or driver’s licenses.
- Example workflow:
  - Alice obtains a hashed certificate from an authorized service provider and joins the KYC perimeter.
  - Alice’s wallet generates a zkKYC token that cryptographically proves she has a verifiable credential; the token confirms legal status, transaction amount thresholds, and other relevant data without revealing identity to the counterparty unless conditions for disclosure are met.
- KYC credential issuers maintain databases of validated user credentials and can update or revoke credentials when compromised; if a user’s legal status changes (for example, due to a sanction), compliance proof would fail and transactions within the KYC perimeter would be blocked.

### Technological and systemic challenges
- Significant computational burden for a large-scale modern payment system: smart contracts must interpret complex and evolving regulations at throughput rates allowing close-to-real-time payments.
- Risk of simplistic rule sets generating many false-positive and false-negative compliance checks, overwhelming enforcement authorities with noise and risking exploitation by bad actors.
- Computational cost of privacy-preserving mechanisms may cause delays during peak-payment periods.
- Compliance-by-design systems may add frictional costs and delays when moving funds between different payment systems.
- Potential mitigation strategies:
  - Allow regulated providers to license and manage smart contracts, providing compliance as a service so users grant limited access to payment data in exchange for compliance services.
  - Advances in applied cryptography and zero-knowledge-proof implementations may improve speed.
  - Multiparty computation and other techniques may help reduce the computational burden of administering smart contracts.

### Enforcement, governance, and cross-border issues
- The model enables layered detection and oversight:
  - White-listed transactions proceed seamlessly.
  - Flagged transactions may be delayed or trigger automated SARs.
  - High-risk transfers involving known offenders may be blocked.
- Smart contracts can be dynamically updated to reflect evolving regulatory priorities, special cases, and insights from statistical analysis of payment patterns.
- Governance requirements:
  - Establish a trusted ecosystem of credential issuers; credential issuers and smart contract operators must be carefully licensed, transparent, and accountable.
  - Governments, banks, and certified financial technology firms could act as trusted nodes anchoring users to the compliance perimeter.
  - Trusted credential issuers must follow uniform standards for KYC verification and be interoperable across multiple ledgers.
  - System-wide compliance quality depends on the least rigorous credential issuers.
- Legal due process: jurisdictions may set distinct thresholds for triggering a SAR and for when authorities may unmask a user’s identity (examples in the text include administrative subpoenas versus judicial warrants).
- Cross-border enforcement relies on cross-jurisdictional cooperation; Project Mandala (Bank for International Settlements proposal) uses zero-knowledge proofs to validate a bank’s compliance statement without sharing the bank’s compliance-related data with other banks involved in the payment—analogous to the described approach.

### Policy implications and limitations
- The authors do not propose mandating compliance-by-design for all stablecoin payment systems; even if some countries required it, blocking domestic access to alternative offshore stablecoin systems that do not adopt this approach would be challenging.
- Stablecoins can improve financial inclusion and payment efficiency, but must achieve a better balance between privacy and compliance.
- Key policy considerations:
  - Licensing and accountability of credential issuers and smart contract operators.
  - Uniform and interoperable KYC verification standards across ledgers.
  - Adaptation of laws to specify SAR triggers and conditions for unmasking identities, with different jurisdictions potentially requiring different due-process thresholds.
  - International cooperation frameworks for cross-border compliance enforcement.

### Key statements and findings
- “The stablecoin payment system we have described replaces time-consuming ‘off-chain’ manual reactive reviews—common practice today—with proactive real-time ‘on-chain’ algorithmic supervision.”
- “Compliance-by-design offers a promising path forward but is not a silver bullet.”
- “Stablecoins hold significant promise for improving financial inclusion and the efficiency of payment systems—and making life harder on modern-day Al Capones. But they need to reach a much better balance between privacy and compliance.”

*Source: fd-september-2025 - Section 6*

### Section 7

### fd-september-2025 - Section 7

### Blockchain, stablecoins, and governance debate
- Dialogue highlights key concerns and potential solutions:
  - Governance, privacy, and consumer recourse are central issues.
  - Possible accountability model: “The phone number will be that of your wallet, of your broker, or the asset issuer. They could control the assets and take responsibility.”
  - Transaction rules could be hard-coded into the asset and automatically enforced.
  - Stablecoins can be reissued on different blockchains, but “jumping chains is expensive and risky” and may introduce cyber risks.
  - Competition among blockchains provides diversity: “One chain may be better for privacy, another for programmability, and a third for speed.”
  - Compatibility across chains is the policy goal: “Code written for one chain—to establish ownership, swap assets, or check identities—should run on another chain.” Compatibility alleviates concentration and fragmentation risks.
- Policy trade-offs and incentives:
  - Private firms currently rebating most of their revenue to users through incentives; competition expected to augment that.
  - Revenue pressures if Treasury yields approach zero in downturns may force firms to find other revenue sources.
  - Central banks could provide incentives to foster innovation, raising questions about public support for private-sector innovation.

### India’s frictionless payments — case study
- System overview and impact:
  - Unified Payments Interface (UPI) launched in 2016.
  - UPI is “the largest real-time payment system in the world by volume, processing more than 19 billion transactions every month.”
  - Most UPI transactions take place across different apps, enabled by interoperability.
  - UPI operator launched BHIM, a public app to introduce the system to new users.
  - More than 200 apps and most banks entered the market as UPI gained traction.
- Evidence of interoperability driving growth:
  - 2016 banknote demonetization favored interoperable UPI over closed-loop apps, leading to more rapid UPI growth driven by cross-app transactions.
  - 2017 regulatory push brought a leading closed-loop provider into UPI; districts with the most initial fragmentation saw faster digital payment growth after the linkage.
  - Both merged networks were used more and transactions between them picked up; total digital payments rose relative to proxies for cash usage.
- Market dynamics and concentration monitoring:
  - Over 95 percent of UPI transactions are initiated using only three apps.
  - In about half of those transactions, both payer and payee use the same app.
  - Authorities should track usage patterns, app dominance, and switching costs to preserve user choice.
- Complementary enablers:
  - A broad digital ID system, financial inclusion programs, and affordable mobile internet supported UPI’s success.
  - Governments can support early adoption with a public app to build momentum.
- Lessons for other countries:
  - Start with open infrastructure and interoperability.
  - Invest in digital enablers: affordable mobile data, national ID systems, and broad access to banking.
  - Monitor the market and tailor regulation to maintain user choice and competition.

### Southeast Asia’s cross-border payment push — case study
- Domestic QR and instant payment context:
  - Seamless QR code payments widely used across Southeast Asia; mass adoption accelerated during the COVID-19 pandemic.
  - Indonesia’s QRIS (established 2019) does not charge small businesses for processing payments below 500,000 rupiah ($30); settlement is instant. Transactions above this threshold cost just 0.3 percent.
- Bilateral and multilateral connectivity efforts:
  - Bilateral links began with Thailand–Singapore in 2021; others include Singapore–India and Thailand–Malaysia.
  - Nexus Global Payments (NGP), a nonprofit established by several central banks in April 2025, aims to improve cross-border connectivity via a shared node and common system.
  - Project Nexus concept: IPS operator connects once to Nexus to reach all other countries in the network, avoiding resource-intensive pairwise linkages.
- Technical, policy, and commercial prerequisites:
  - Common technical standards, operating processes, consistent approaches to data privacy, security, sanctions screening, and a consistent commercial model are required for multilateral connectivity.
  - Each bilateral linkage previously required “a refresh in technical alignment” and alignment in domestic policies; PayNow–PromptPay linkage took three years to finalize.
- Implementation timeline and expectations:
  - NGP is focused on foundational work and expects to appoint a technical operator “this year.”
  - MAS’s Kenneth Gay expects “the first live cross-border transaction on Nexus around 2027,” before expanding to other interested countries.
- Market and institutional readiness challenges:
  - Large-scale cross-border adoption depends on sustained collaboration among governments, central banks, and fintech firms.
  - Many banks still “operate on legacy systems,” posing bottlenecks; smaller banks risk being left behind.
  - Fintech firms and banks can benefit by upgrading technology to tap into burgeoning IPSs.

### Key statistics, dates, and factual points
- UPI launched: 2016.
- UPI transaction volume: “more than 19 billion transactions every month.”
- UPI ecosystem: “more than 200 apps and most banks.”
- UPI concentration: “over 95 percent of UPI transactions are initiated using only three apps”; “in about half of them, both payer and payee use the same app.”
- India events: 2016 banknote demonetization; 2017 regulatory push linking a closed-loop provider to UPI.
- Indonesia QRIS established: 2019.
- QRIS fees: free for transactions below 500,000 rupiah ($30); 0.3 percent for transactions above that threshold.
- Singapore PayNow introduced: 2017.
- PayNow–PromptPay linkage completion: 2021 (took three years of collaboration).
- Nexus Global Payments (NGP) established: April 2025.
- Expected first live Nexus transaction: “around 2027.”

### Policy implications and recommendations
- Prioritize interoperability to unlock user choice, innovation, and digital acceleration.
- Build open infrastructure and public options (e.g., a public app) to catalyze adoption.
- Invest in supporting enablers: digital ID systems, affordable mobile internet, and broad banking access.
- Monitor market structures and dominance: track app usage patterns, switching costs, and concentration to preserve competition and user choice.
- Coordinate cross-border technical standards, data privacy, security, and sanctions screening before scaling multilateral connections.
- Support smaller banks in upgrading legacy systems to avoid bottlenecks and exclusion as IPSs expand.
- Consider central bank incentives to foster private-sector innovation while evaluating implications for revenue models under low Treasury yield scenarios.

*fd-september-2025 - Section 7*

### Section 8

### FIGHTING TECH-FUELED CRIME

### Overview
- The Department of Justice in June announced the largest-ever US crypto seizure: $225 million from crypto scams known as pig butchering.
- The seizure involved federal agents collaborating across jurisdictions and using blockchain analysis and machine learning to track thousands of wallets used to scam more than 400 victims.
- Despite the seizure, criminals continue to adapt rapidly, often outpacing enforcement.

### Scale and trends of illicit crypto and digital-enabled crime
- Annual illicit crypto activity growth has averaged about 25 percent in recent years.
- Illicit crypto activity may have surpassed $51 billion last year, according to Chainalysis.
- Bad actors still rely on cash and traditional finance—banks, informal money changers, and cash couriers—while layering new technologies to thwart detection.

### Techniques and tools used by criminals
- Social engineering schemes such as romance or investment scams (pig butchering) using AI-generated profiles.
- Encrypted messaging, obscured blockchain transactions, decentralized exchanges, and anonymity-enhancing tools.
- Stablecoins and lightly regulated virtual asset platforms to hide bribes and embezzled funds.
- AI-generated identities, voice-cloning, fake-document generators, bots, and deepfakes to bypass verification protocols.
- Encrypted apps facilitating coordination by cartels for cross-border transactions.

### Challenges facing authorities and regulators
- Authorities are constrained by jurisdictional limits, legacy systems, process bottlenecks, and underresourced agencies.
- Delays in implementing global standards such as the FATF’s “travel rule” impede better identification of senders and receivers across borders.
- Most payments still traverse multiple intermediaries and antiquated correspondent banks, obscuring and delaying transactions and raising costs.
- Tracking proceeds from organized crime is nearly impossible for underresourced agencies.

### Innovations and constructive responses
- Regional fast payment linkages: Singapore and Thailand linked fast payment systems enabling real-time retail transfers using mobile numbers; Indonesia and Malaysia have connected QR codes for cross-border payments.
- India’s Unified Payments Interface: More than 18 billion monthly transactions across competing platforms, demonstrating interoperability, openness, and scale.
- The FATF’s June recommendation requiring originator and beneficiary information for cross-border wire transfers—including those involving virtual assets—aims to enhance traceability.
- IMF work on “safe payment corridors” helps countries build trusted channels for legitimate financial flows without undermining new technology; a pilot with Samoa preserved remittance access through targeted safeguards and collaboration with regulated providers.

### Machine learning, analytics, and capacity-building
- Several countries, with IMF guidance, are investing in machine learning to detect anomalies in cross-border financial flows.
- Governments are investing in capacity to trace crypto transfers; blockchain analytics firms are often employed.
- Legal frameworks must adapt to enable timely access to digital evidence while preserving due process.
- Supervisory models need to evolve to oversee banks and nonbank financial institutions offering cross-border services.
- Recommended actions for governments and regulators:
  - Invest in regulatory technology, such as AI-powered transaction monitoring and blockchain analysis.
  - Hire and retain expert data scientists and financial crime specialists.
  - Bring virtual assets under AML/CFT regulation.
  - Foster public-private partnerships to codevelop tools to spot emerging risks.
  - Back global standards from the FATF and the Financial Stability Board with national investments in effective AML/CFT frameworks.
  - Promote interoperability and risk-based regulation while respecting privacy.

### Risks of fragmentation and urgency
- Fragmented and uneven responses leave openings that criminals exploit, increasing technological advantage over governments.
- The growing tech-enabled advantage of criminal networks risks undermining financial integrity, destabilizing economies, weakening institutions, and eroding public trust.
- The article’s central admonition: Governments must invest and act urgently—“Governments can’t wait. The criminals won’t.”

*Section authored by Chady El Khoury, assistant general counsel and division chief in the IMF’s Legal Department.*

### Section 9

### fd-september-2025 - Section 9

### European institutional legacy and technological disruption
- Europe’s economic institutions were shaped by a long history of industrial catch-up, established in the late 19th century and reinforced during the postwar era to close the gap with the US.
- These institutions emphasized stable and predictable growth through careful planning, coordinated industries, and close cooperation between businesses, banks, and governments—“coordinated capitalism.”
- Such arrangements worked well for incremental technological progress but became obstacles during rapid, uncertain disruption from the computer revolution and new information technologies.
- Country-specific examples of institutional rigidity:
  - France: indicative planning set economic targets to coordinate investments, but planners were overwhelmed by rapid technological change and unable to forecast or allocate resources effectively.
  - Italy: state-owned enterprises, crucial in the postwar boom, proved rigid and unresponsive in the face of technological turbulence.
  - Spain and Portugal: heavy state influence and entrenched interests limited economic flexibility, hampering innovation and adaptation and contributing to prolonged stagnation during the computer revolution—often referred to as “two lost decades.”
- Core lesson: Economic miracles stall when institutions that enabled past successes become misaligned with new challenges.

### Innovation dynamics in the AI era: limits of centralization and scale
- Historical and technical observations:
  - Large language models (LLMs) grew 10,000-fold in scale between 2019 and 2024 yet still scored only about 5 percent on the ARC reasoning benchmark.
  - Leaner approaches such as program search have topped 20 percent on the same benchmark.
  - In-context learning methods are emerging and “racing ahead.”
- Argument on exploration versus scale:
  - True breakthroughs come from exploring the unknown rather than perfecting formalized precedents; centralized scale alone is unlikely to yield radical innovation.
  - Language models trained on historical literature default to statistical consensus and can replicate past errors or limitations.
  - Embodied, sensorimotor knowledge remains lacking in LLMs; centralized AI systems will trail decentralized human experimentation until embodied knowledge can be encoded.
- Quotation-style claim preserved from the text: “several more innovations” may be needed to reach true artificial general intelligence.

### Control, competition, and national trajectories
- China:
  - Dynamic sectors remain driven by private or foreign-backed firms; state-owned enterprises lag.
  - Beijing is recentralizing authority: licenses, credit, and contracts now favor politically reliable conglomerates; antitrust law is wielded selectively; anti-corruption campaigns make loyalty a prerequisite for survival.
  - Provincial experimentation has withered; crude indicators such as patent counts are chased, leading to low-value filing inflation.
  - Firms without strong political connections (example in text: DeepSeek) tend to be most innovative but face legal and political vulnerability, forcing them to divert resources into political alliance-building.
  - The government’s control over critical information technologies frequently tempts authorities to strengthen political dominance, potentially stifling grassroots innovation.
- United States:
  - Industries have grown markedly more concentrated since the computer era of the 1990s, with non-compete clauses hampering labor mobility and curbing tacit knowledge flows.
  - Incumbent lobbying hard-codes regulatory advantages (patent extensions, sector-specific licensing hurdles), weakening creative destruction.
  - Market concentration specifics preserved from the source:
    - Microsoft’s alliance with OpenAI controls about 70 percent of the commercial LLM market.
    - Nvidia provides about 92 percent of the specialized graphics-processing units (GPUs) used to train these models.
    - Alphabet, Amazon, and Meta have been acquiring stakes in promising AI start-ups.
- Policy implication: Sustaining a policy regime that safeguards the competitive arena itself—rather than the fortunes of particular firms—is essential for enabling the next generation of transformative innovators.

### US entrepreneurial geography: decentralization and data-center-driven clusters
- Geographic shift and drivers:
  - Start-up activity is dispersing from traditional hubs like California and New York to more rural western and southern states, aided by AI tech adoption and remote/hybrid work.
  - Example: In Laramie, Wyoming, Airloom Energy is developing a compact wind turbine system and plans to break ground on a pilot project “this year” (as described in the source).
  - Wyoming has seen 50 percent growth in start-ups over the past decade.
  - Census data show 7 of the top 10 states for start-up activity in 2010–25 were in the South.
- Data centers as focal points and investments (figures preserved exactly as presented):
  - JPMorgan Chase and Starwood Property Trust have committed $2 billion for a 100-acre data center development in West Jordan, Utah, near Salt Lake City.
  - JPMorgan Chase made a loan of $2.3 billion in January 2025 for a facility in Abilene, Texas.
  - Meta plans to build an $800 million, 715,000-square-foot data center in Cheyenne, Wyoming.
  - Amazon is building two data centers in Madison County, Mississippi, for a total cost of $10 billion.
  - Google is building a $2 billion center in Fort Wayne, Indiana, and a $1 billion center in Virginia.
- Effects of decentralization:
  - Data centers foster entrepreneurial culture, encourage risk taking, and create local AI tech supply chains that reinforce experimentation.
  - AI tech enables smaller firms to perform tasks once dominated by large corporations, supporting productivity gains across sectors (healthcare, manufacturing, administrative tasks).

### Start-up composition, productivity, and labor implications
- Venture funding and start-up metrics:
  - According to PitchBook, AI start-ups accounted for 22 percent of first-time venture capital financing in 2024.
  - The US Census Bureau’s Business Formation Statistics show an “explosion” in new business applications since the onset of the pandemic in 2020: the number of applications to register a new business in the US is about 50 percent higher than before the pandemic (Chart 2).
- Employment and growth patterns:
  - Research from the Federal Reserve suggests the recent wave of start-ups is less likely than previous upsurges to contribute to employment growth.
  - Young, high-growth start-ups accounted for less than 6 percent of employment in 2024, compared with almost 10 percent in 1985.
  - AI-driven start-ups tend to be capital- and skill-intensive, requiring fewer workers; productivity and wage increases manifest most for the highest-skilled workers, while automation reduces wages for routine tasks.
- Spatial and demographic observations:
  - Population density is unrelated to entrepreneurial activity; among the top 10 start-up states, New Mexico and Wyoming have between 5 and 20 people per square mile, while Florida and Texas have 150 to 400 people per square mile.
  - Larger firms often acquire start-up founders’ ideas, reducing the need for independent growth; examples in the text: Microsoft acquired all of Inflection AI and its 70-person workforce in 2024, and Microsoft acquired Nuance Communications in 2022.

### Policy implications and recommendations
- To sustain innovation and productivity gains in the AI era, the section highlights several policy directions:
  - Preserve and protect a competitive arena rather than protecting incumbent firms’ fortunes.
  - Lower barriers to entry and widen the arena of experimentation to foster decentralized innovation.
  - Policymakers can support emerging start-up hubs through targeted industrial policy: investing in infrastructure, education, and regulatory frameworks that lower entry barriers and foster innovation.
  - For regions attracting data centers and AI-driven businesses, address resource needs (cheap energy and other inputs) and provide supportive local regulations to sustain entrepreneurial clusters.
  - Avoid policy designs that concentrate control (political or market) in ways that displace competence with patronage or lock in incumbents’ advantages.

*Source: fd-september-2025 - Section 9*

### Section 10

### MEASURES OF UNCERTAINTY DON’T QUITE MEASURE UP

### How uncertainty is measured
- No single dominant metric; measurements differ by source and horizon.
- Three main measurement approaches:
  - Textual analysis (newspapers, country reports, official publications).
  - Financial markets (implied volatility indices).
  - Business surveys (firm expectations and sales forecasts).
- Text-based measures discussed:
  - Economic Policy Uncertainty (EPU) Index (Baker, Bloom, and Davis 2016) analyzes articles in hundreds of newspapers for mentions of economics, policy, and uncertainty; the US EPU has typically surged during crises (examples: 2008 financial crisis; 2020 COVID pandemic).
  - World Uncertainty Index (WUI) (Ahir, Bloom, and Furceri 2022) based on frequency of the term “uncertain” in Economist Intelligence Unit country reports covering 71 countries; WUI shows a trajectory similar to EPU.
- Market-based measures discussed:
  - Chicago Board Options Exchange Volatility Index (VIX): a 32-year-old index measuring one-month-ahead implied volatility of the S&P 500.
  - Intercontinental Exchange Bank of America MOVE Index: gauges implied volatility on bond yields.
- Survey-based measures discussed:
  - US Survey of Business Uncertainty (SBU), administered by the Atlanta Federal Reserve Bank, queries almost 1,000 US businesses each month on sales forecasts.
  - UK Decision Maker Panel (DMP) polls about 2,500 businesses a month; measures company-level sales growth uncertainty.

### Recent readings and discrepancies across measures
- Text-based indices:
  - In 2025, the EPU reached a record high, indicating extensive discussions of uncertainty in national and local newspapers.
  - The WUI exhibits a similar high trajectory, implying elevated uncertainty perceptions across countries.
- Market-based indices:
  - VIX was elevated in 2025, reaching 32 in April, but that level was not a large spike relative to past jumps (historical spikes cited: 1997, 1998, 2008, 2011, 2020).
  - MOVE Index shows a comparable pattern: increased but not extreme uncertainty.
- Survey-based indices:
  - SBU doubled between January and May 2020 during the pandemic, then eased; through June 2025 there was no surge comparable to text-based measures.
  - SBU panel raised sales-growth predictions after the November 2024 election of Donald Trump; forecasts declined in spring 2025 after the beginning of tariff wars.
  - UK DMP mirrored the US pattern: a pandemic surge but no recent increase through the latest observations.
- Puzzle identified:
  - Text measures surged in 2025 while market measures rose moderately and survey measures remained largely flat through June 2025.
  - Possible explanations offered:
    - Text measures may be inflated by intense media focus on US politics (for example, the Trump administration).
    - Financial and business measures are shorter-term and US-focused and may miss longer-term global uncertainty.
  - Authors’ assessment: global uncertainty has risen, but not as much as text-based measures alone would suggest.

### Mechanisms: how uncertainty affects the economy
- Real-options channel:
  - Firms view investment decisions as options; higher uncertainty raises the option value of waiting, reducing irreversible investment and hiring.
  - Real-options effects are more relevant when decisions cannot be easily reversed; firms may substitute toward reversible choices (part-time hiring, renting).
- Consumption channel:
  - Higher income uncertainty leads households to postpone purchases of durables (housing, cars, furniture) because the option value of waiting rises.
- Financial-cost channel:
  - Uncertainty raises risk premia, increasing the cost of borrowing and the probability of default.
- Interaction with financial frictions:
  - Uncertainty effects are magnified when financial conditions are tight; uncertainty and financial frictions can have multiplicative impacts.
- Empirical findings summarized:
  - Greater uncertainty has a strong impact on reducing investment.
  - Uncertainty has a weaker effect on lowering employment and consumption.
  - Uncertainty helps drive business cycles.

### Outlook and economic impact assessment
- Comparative scenarios:
  - A surge in uncertainty of the magnitude implied by text-based measures could be extremely damaging and potentially lead to a global recession.
  - A rise in uncertainty of the magnitude signaled by financial markets might slow growth without causing a recession.
  - If business surveys are correct (no recent rise), uncertainty has changed little over the past year.
- Authors’ best assessment:
  - Uncertainty is not as high as text measures imply (text may be distorted by US political turmoil) but not as low as survey measures suggest.
  - Uncertainty has risen above its long-term levels without reaching the peaks observed during the global financial crisis or the pandemic.
  - The 2025 surge in uncertainty is expected to slow growth by reducing investment, hiring, and consumer spending on durable goods.
  - Timing: the impact of uncertainty typically takes 6 to 18 months to slow growth (Caldara and Iacoviello 2022), implying effects likely through 2025 and 2026.
  - Final judgment: the rise in uncertainty is not large enough to induce a global recession.

*Source: SEPTEMBER 2025 F&D — “Measures of Uncertainty Don’t Quite Measure Up,” Hites Ahir, Nicholas Bloom, and Davide Furceri.*

### Section 11

### fd-september-2025 — Section 11

### Monopoly capitalism and historical parallels (Marc‑William Palen)
- Historical narrative linking trade liberalization and subsequent turn to protectionism:
  - "The quarter century between the end of the Corn Laws in 1846 and the start of the global turn to protectionism in the early 1870s saw unprecedented trade liberalization, as did the 25 years after the end of the Cold War."
- Patterns of economic nationalism and infrastructure-driven imperial strategies:
  - Canada: Conservative Party forged closer economic ties within the British Empire; the newly completed Canadian Pacific Railway functioned as a land bridge connecting Britain with colonies in the Pacific.
  - Germany: Otto von Bismarck consolidated German states, erected tariff walls, and sought colonies; Wilhelm II initiated construction of the Berlin-to‑Baghdad railway.
  - Russia: Count Sergei Witte, inspired by List, held roles from director of railway affairs to prime minister and began construction of the Trans‑Siberian railway to facilitate imperial aims in Manchuria.
  - Similar dynamics occurred within the empires of France and Japan.
- Intellectual and grassroots responses to monopoly capitalism:
  - Henry George’s Progress and Poverty (1879) promoted Georgism ("single tax") aimed at breaking up land monopolies and abolishing tariffs.
  - Georgism attracted international adherents, including Leo Tolstoy and Sun Yat‑Sen (who stepped down in 1912 to promote Henry George’s teachings).
  - Lizzie Magie patented a board game in 1904 to teach Georgist ideas, antecedent to Monopoly.
- Critiques and warnings:
  - J. A. Hobson’s Imperialism: A Study (1902) critiqued monopoly capitalism and colonial scramble.
  - Norman Angell warned of the "great illusion" of war’s profitability; World War I four years after his warning validated the concern.
- Lessons for contemporary supporters of economic interdependence:
  - Historical free‑trade advocates underestimated nationalism and self‑sufficiency’s political appeal.
  - Palen argues that history offers guidance: international cooperation can counteract nationalist-driven conflict and advance a more peaceful, equitable free‑trade world.

### Guido Imbens — reshaping causal inference (People in Economics, Noah Berger)
- Major contribution:
  - Shared the 2021 Nobel Prize in Economics with Joshua Angrist and David Card for transforming understanding of cause and effect.
  - Developed tools to estimate counterfactual outcomes using natural experiments and messy observational data.
- Key methodological advances:
  - Local Average Treatment Effect (LATE) framework:
    - Estimates how an intervention affects people who experience it only because of an external shift (law, rule, change in circumstance).
    - Applied examples: effect of government‑paid health insurance availability at age 65 on health care use; earnings effects of compulsory education laws.
  - Building on Donald Rubin’s foundational work in statistics and earlier natural experiments (e.g., Angrist and Krueger 1991 quarter‑of‑birth study).
- Illustrative natural experiment:
  - Vietnam War draft lottery:
    - Randomly assigned draft numbers influenced conscription likelihood.
    - Allowed comparison of otherwise similar individuals to estimate causal effects (e.g., earnings) attributable to conscription versus other factors.
- Impact and applications:
  - LATE and causal inference methods are standard tools in economics, health, education, policy evaluation, and industry (e.g., randomized rollouts in tech platforms).
  - Helped move economics toward evidence‑based policy by focusing on plausible comparisons and what would have happened under different circumstances.
- Personal and career notes:
  - Born in 1963 in Geldrop, southern Netherlands.
  - Education and career path:
    - Master’s in 1986 at the University of Hull.
    - PhD in 1991 from Brown University.
    - Faculty positions: Harvard, UCLA, UC Berkeley, Stanford.
    - In March 2025, named faculty director of Stanford Data Science.
  - Collaborative influences and partnerships:
    - Longstanding collaboration and friendship with Joshua Angrist (development of LATE).
    - Influenced by Donald Rubin and Alan Krueger.
    - Shared personal anecdotes: early laundry‑room collaborations; donated a container of laundry detergent to the Nobel Prize Museum as a symbol of collaborative origins.
- Broader assessment:
  - Imbens occupies a middle ground between theory and practice, emphasizing methodologies that serve applied empirical work.
  - He emphasizes mentoring, interdisciplinary ties, and making econometrics useful for real‑world problems.

### Taxing matters — taxation and innovation (intro to Stefanie Stantcheva)
- Research focus:
  - Stefanie Stantcheva studies how tax policy affects innovation, reasoning, perceptions, beliefs, and attitudes.
  - She founded Harvard’s Social Economics Lab to investigate these issues.
- Recognition:
  - Winner of the 2025 John Bates Clark Medal (awarded to the most significant contributions by an economist under age 40).
- Background highlights:
  - Grew up in Bulgaria in the 1990s amid hyperinflation; later lived in France and East Germany.
  - Nathaniel Ropes Professor of Political Economy at Harvard.
- Thematic concerns introduced:
  - Tension between taxes (the civic financing role encapsulated in Oliver Wendell Holmes Jr.’s phrase on the IRS building) and innovation (Steve Jobs’ view that "Innovation distinguishes between a leader and a follower").
  - Stantcheva’s work examines whether tax policy can "make or break the innovative spirit" and explores phenomena such as zero‑sum thinking among younger generations.
- Engagement with F&D:
  - Stantcheva discusses old and new thinking in economic policy with F&D contributor Rhoda Metcalfe.

*Source: fd-september-2025 — Section 11*

### Section 12

### Section 12 — Café Economics interview and Book Reviews

### Taxation, innovation, and location effects
- Key finding: Taxation has a negative effect on innovation in the United States, both in quantity (measured by number of patents) and in location — states with higher personal—and especially higher corporate income taxes—lost out to lower-income-tax states in terms of innovation.
- Historical scope cited: effects traced back to the 1930s.
- Nuance: High taxes do not automatically eliminate innovation if locations offer strong amenities (for example, California), existing inventor concentration, and research infrastructure.
- Mobility: Superstar inventors are highly mobile and sensitive to taxes; migration effects are powerful for highly qualified inventors.
- Policy implication: Because taxes are necessary to raise revenue for public spending, it is important to dampen their negative economic effects by:
  - Spending revenues on research and innovation infrastructure.
  - Financing amenities that make locations attractive, thereby allowing a state or country to sustain higher taxes without losing all innovative capacity.

### Surveys, experimental methods, and understanding perceptions
- Methodology described: Surveys at the Social Economics Lab combine deep questioning about reasoning, perceptions, beliefs, and attitudes with experimental elements (randomized information exposure) to reveal causal patterns in how people think about economic policies.
- Data product: "Big data" on mental model patterns—quantitative analysis of what happens in people’s minds that is invisible in conventional data.

### Climate policy perceptions and fairness trade-offs
- Empirical insight: When asked to trade off taxing pollution versus banning it, many people favor outright bans on polluting goods (example: polluting cars) because of equity concerns—perception that the rich can "simply pay to pollute" makes bans feel fairer, even though economic theory suggests taxation is more efficient.

### Zero-sum thinking: prevalence and consequences
- Definition: Zero-sum thinking is the belief that if one individual or group gains, it must come at the expense of another.
- Findings on prevalence:
  - More prevalent among younger people in the United States and other rich countries.
  - In emerging market economies, the pattern is reversed: younger generations are less zero-sum than older ones.
  - Individual experience matters: people whose families experienced upward mobility are less likely to be zero-sum.
- Political effects:
  - Zero-sum thinking is not partisan—"evenly distributed across both sides of the political divide"—but explains within-party variation in policy views.
  - People more prone to zero-sum thinking favor more government intervention and more redistribution, driven by the belief that the gains of the rich come at the expense of the poor.
- Broader implication: Rising zero-sum attitudes among younger generations could influence future policy preferences and politicize economic debates in new ways.

### Overarching perspective on taxation research
- Taxes shape many aspects of economic life; a well-designed tax system can encourage growth, equality, and provision of infrastructure and public services, while a poorly designed system can harm economic development.
- Research emphasis: Understand how taxes affect incentives for innovators and how spending of tax revenues can mitigate negative effects.

*This interview has been edited for length and clarity. Visit www.imf.org /podcasts to hear the full interview.*

### Book reviews (high-level summaries)
- False Dawn: The New Deal and the Promise of Recovery, 1933–1947 (George Selgin, University of Chicago Press, Chicago, IL, 2025, 384 pp., $35)
  - Thesis: The New Deal was not a coherent predesigned plan; components were often cobbled together after inauguration. Roosevelt was not influenced by Keynes and remained fiscally conservative until after 1937; policy uncertainty under the New Deal undermined investment.
  - Research gap noted: Need for improved empirical studies estimating the effects of policy uncertainty on investment.
- Trade in War: Economic Cooperation across Enemy Lines (Mariya Grinberg, Cornell University Press, Ithaca, NY, 2025, 259 pp., $48)
  - Thesis: Wartime trade reflects a balance between economic and security imperatives; states allow as much trade as makes military sense and prohibit trade that is militarily dangerous but economically viable.
  - Historical insight: Introduction of "neutral rights" during the Crimean War shifted practice away from severing all trade; case studies show evolving wartime trade policy across conflicts including World War I.
  - Contemporary implication: Global value chains and interdependence make wholesale decoupling during modern conflicts unlikely.
- Surviving Rome: The Economic Lives of the Ninety Percent (Kim Bowes, Princeton University Press, Princeton, NJ, 2025, 512 pp., $39.95)
  - Thesis: Ordinary Romans—constituting the "ninety percent"—lived complex economic lives using multiple income sources, credit, pawning, and small capital to survive; archaeological and documentary evidence from the past 20 years reveals a richer picture of premodern economies.
  - Comparative note: Bowes draws parallels between the precarious economic existence of many ancient Romans and the precarious economic existence of many people today.

*F&D: Finance & Development, SEPTEMBER 2025*

### Section 13

### Bermuda’s new notes honor history with more durable, accessible, and sustainable design

### Tradition and historical themes
- Bermuda’s first coins, minted around 1616, were “hogge money” featuring a galleon and a hog, reflecting free-roaming swine abandoned by Spanish and Portuguese mariners.
- After a few years, the poor-quality money was abandoned when tobacco became the local currency.
- Since the creation of the Bermuda Monetary Authority (BMA) in 1969, banknotes and coins have consistently highlighted the Atlantic archipelago’s flora, fauna, and landscape.

### Recent issuance and denominations
- The BMA introduced new $2 and $5 banknotes last year.
- The currency has been pegged to the US dollar since 1972, and both circulate interchangeably.
- Updates for $10, $20, $50, and $100 bills will follow the $2 and $5 changes.
- The $5 notes show a blue marlin, Horseshoe Bay Beach, and Somerset Bridge—a short early 1600s span known as the world’s smallest drawbridge with a wood plank, less than a meter wide, that can be raised to let the masts of sailboats pass through.
- The $2 bill shows a Bermuda bluebird, the Dockyard clock tower, and the statue of Neptune.
- Both notes show the new head of state, King Charles III, in his first appearance on the currency.

### Design, accessibility, and material changes
- The notes largely keep the original appearance while introducing shared design elements aimed at greater durability and security.
- They are Bermuda’s first printed on polymer substrate, a thin plastic that’s easier to keep clean than cotton and is expected to circulate more than twice as long.
- Visually impaired users can identify the notes by embossed dots: they form a triangle on the $2 note and a circle on the $5 bill.

### Security and advanced features
- Security details include:
  - a reflective tuna with a shadow outlined on the opposite side;
  - another tuna visible when lit from behind;
  - a clear window showing clouds and underwater scenes.
- Dynamic visual features: waves, fish, and the sun flash gold when notes are tilted.
- Ultraviolet light reveals hidden elements.
- The design blends “high-tech security measures” with a “colorful, eye-pleasing design,” language used by the International Bank Note Society when awarding Bermuda’s pink $5 bill Banknote of the Year.

### Recognition
- Bermuda’s pink $5 bill won the Banknote of the Year award from the International Bank Note Society, which cited its high-tech security measures and “colorful, eye-pleasing design.”
- The industry group High Security Printing Latin America named the $2 and $5 best new 2025 notes.

*Finance & Development — Jeff Kearns and Melinda Weir. This page: COURTESY DE LA RUE. OPPOSITE: MARC GUITARD/GETTY IMAGES*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/09/fd-september-2025.pdf_