The BRICS Bank: A First Look

Recently one of the big stories in the financial world is the Agreement among the BRICS (Brazil, Russia, India, China and new member South Africa) countries to start a "BRICS Bank".

The most commonly held view is that these five countries would start this bank with the idea of rivaling and maybe even displacing the US dollar as the world's reserve currency.  This "meme" is apparently incorrect.  The "BRICS Bank" is really closer to a version of the 1944 Bretton Woods Agreement (when the World Bank (called at that time the "International Bank for Reconstruction and Development") and the International Monetary Fund (IMF) were founded).  Keep in mind that in 1944, World War II was not even over when they made the Agreement.  The World Bank and IMF both started operating in late 1945.

Important Disclosure!  I would not have been able to write this article without the help of a few individuals, ESPECIALLY one who wishes to remain anonymous.  To my knowledge, all of what I write is true, based on some help I received and my own research.  I thank various correspondents who chipped in various observations as well to make this a better article.

The Bretton Woods Agreement was agreed to by most of the large economies of the world at that time, not includng, of course, German, Italy and Japan (the Axis powers) who later DID join (both the World Bank and the IMF).  China was an original member, Italy went on to join the World Bank and IMF in 1947, Germany and Japan joined both institutions in 1952.  Sources:

http://www.worldbank.org/en/about/leadership/members

http://www.imf.org/external/np/sec/memdir/memdate.htm

There are a lot of parallels between Bretton Woods and the Fortaleza Agreements, some of which I will discuss, though not in a detailed way.  All four of these Agreements are essentially complicated international treaties.

The "BRICS Bank" is actually to be two new institutions: The New Development Bank ("NDB") and the Contingent Reserve Arrangement ("CRA").  The NDB fairly well correlates with the World Bank, and the CRA roughly correlates with the IMF.

The NDB and World Bank mostly (will) focus(es) on infrastructure and similar lending to developing countries.  The CRA and the IMF (will) focus(es) on lending like emergency funding (Greece) and funding to bridge over trade imbalances.

Here are the two relevant paragraphs from the "Fortaleza Declaration" (in blue, link here: http://brics6.itamaraty.gov.br/media2/press-releases/214-sixth-brics-summit-fortaleza-declaration), these show in general terms what the BRICS members have in mind re the NDB and the CRA:

12. The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed capital shall be of US$ 50 billion, equally shared among founding members. The first chair of the Board of Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil. The first President of the Bank shall be from India. The headquarters of the Bank shall be located in Shanghai. The New Development Bank Africa Regional Center shall be established in South Africa concurrently with the headquarters. We direct our Finance Ministers to work out the modalities for its operationalization.

13. We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements. We appreciate the work undertaken by our Finance Ministers and Central Bank Governors. The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures. 

Text of the the two Agreements for the NDB and the CRA can be found here:

http://brics6.itamaraty.gov.br/media2/press-releases/219-agreement-on-the-new-development-bank-fortaleza-july-15

http://brics6.itamaraty.gov.br/media2/press-releases/220-treaty-for-the-establishment-of-a-brics-contingent-reserve-arrangement-fortaleza-july-15

These are long...

The official language is English, I saw nothing written about the Agreements being official in Mandarin, Russian or Portuguese (although, of course, official translations exist for the internal use of each country).

There is one big difference between the two sets of institutions, however.  The World Bank and the IMF have 188 countries as members (almost all countries), while the NDB and CRA have but five.

***

First I wold like to examine a couple of main ideas of both the IMF and the CRA.  One important issue is their participation, that is, how many countries are joining (there are five, although others may be admitted later on), and what their contributions are to be.  The below (in blue) is straight out of the CRA Agreement:

Article 2 - Size and Individual Commitments

a. The initial total committed resources of the CRA shall be one hundred billion dollars of the United States of America (USD 100 billion), with individual commitments as follows:

i. China – USD 41 billion
ii. Brazil – USD 18 billion
iii. Russia – USD 18 billion
iv. India – USD 18 billion
v. South Africa – USD 5 billion

That above funding, take note, is in US dollars!  No yuan (renmimbi), no rubles, no rupees, no Brazilian reals, and no rand.  There is no mention of gold anywhere in the CRA.  The total is $100 billion.

Here are the initial quotas from the 1944 Bretton Woods Agreement on the quotas of the founding countries (you will need to *click* on the image for a better view):

http://fraser.stlouisfed.org/docs/historical/martin/17_07_19440701.pdf (page 52 of the pdf)

Not that it means much, but it may be worthwhile to note that in 1944 the US contribution was about 31% of total IMF contributions, in the CRA China is contributing 41%.  In round numbers (and depending on whose figures you accept), China has as large an economy as all the rest of BRICS put together.

***

Another issue that is important to at least glance at is the role of gold in the four institutions.  The IMF specifically mentions gold, and goes into some detail on gold's role in the IMF's planned operations.  Here is a look at Article Four of the Bretton Woods IMF Agreement (recall that in 1944 that the US dollar was defined as 1/35th of an oz of gold):

Nowhere in the CRA is gold mentioned.

For that matter, gold is not mentioned in the NDB Agreement either.

Yet, I have read Jim Willie CB (rightly) discussing the importance of gold in the near future.  In fact, he has written of "Gold Trade Notes" from time-to-time (in his free reports (he also writes much deeper reports that you can subscribe to), here is his website: goldenjackass.com).  I was curious about the whole notion of Gold Trade Notes (apparently they would function as more-or-less replacements to the traditional Letters of Credit now heavily used in world trade), so I ran a Google search just tonight (early AM, 27 July).  There are quite a few results, but every link I clicked referred back to Jim Willie, I saw NO independent articles discussing the Gold Trade Note that did not refer back to Dr. Willie.  I of course concede that Dr. Willie's sources are much better than mine, there very well could be (likely ARE) private discussions between the BRICS members, especially among those hostile to the US dollar...

In some contrast to what Dr. Willie writes about China and Russia (the two core members of the "BRICS Bank" that are somewhat hostile to the USA), I have read elsewhere that China likely values its trade with the USA more so than their trade with Russia...  While no doubt that China is seeking much greater long-term influence in the world's financial system, it does not appear that China would like to pay a price of bad trade relations with the USA or even Europe (Europe is now China's largest trading partner).

***

Another issue of likely major relevance is the possibility of conflicting goals among the members.  While there is always some amount of disagreement among members of the World Bank and the IMF, the institutions seem to work pretty smoothly in accord with their missions.  They have professionals working for them, who are relatively non-political and often are very talented economists (etc.).  My wife worked for the IMF for some three years, and found the level of professionalism to be pretty high, and the level of (national-level) politics to be pretty low.  (Yes, they DID have very nice Christmas parties, I had the fortune of being invited twice!)

I have reason to doubt that the NDB and the IMF will likely operate at a high level of professionalism and international politics taking a back seat.  Please recall that the NDB and the CRA exist now because the BRICS members are not satisfied with the current structures of the World Bank and the IMF.  These countries do have a case (that they are somewhat marginalized, emphasis somewhat).

It is my opinion that the "BRICS Bank" has been born out of frustration and resentment of the more developed world and the way the industrialized countries instruct the borrowers in what they are allowed to do and what not to do.

Also, note that the original term (acronym) for BRIC's (South Africa was recently added to have an African member) was a marketing slogan created by a Goldman Sachs analyst (Jim O'Neill).  Other than resentment of the USA, Europe and Japan, there is relatively little that unites the current five members of the BRICS other than that they are "surplus countries" (exporting more than they import, and so are owners of a lot of US dollars).  That the five BRICS have joined together must make Goldman Sachs crack a smile...

***

The NDB and the CRA do share many attributes of the World Bank and the IMF.  Funding and voting share are fairly strongly correlated in the NDB and CRA (as with the other two).

The texts of both the NDB and the CRA seem to rule out highly concessionary ("easy") terms, and do appear to impose strict terms and repayment policies.  Lending standards (at least what are int he Agreements) are rather strict.  This appears to be prudent, but if the terms are not much easier, then why would poorer countries go there?  Perhaps the terms are easier if the borrowers agree to buy products "Made in China"...

(Maybe I am missing something)

***

The World Bank and the IMF have come under much criticism, from both those interested in more open markets as well as those who want more "justice".   One of the main sources of frustration among the poorer members of the World Bank, for example, is the voting power (number of shares) of each member.  The voting power is roughly correlated with how much money each member has chipped in, less money contributed, the less influence a member will have...  Also, funding to poverty-stricken (or countries in a temporary bind) is subject to oversight by the wealthy countries having the great majority of shares.

On the other hand, much lending over the years has resulted in money being lost to corruption and cronyism as well as projects of dubious value (dams).

There have been numerous reforms that have been passed and are still being examined by the World Bank and the IMF.  As an example, much World Bank lending is now directed towards "sustainable development" and towards lowering carbon emissions...

Many of these reforms are already in the Agreements of the NDB and the CRA.

***

The prospects for the NDB and the CRA are uncertain, IMO.  There are numerous examples of other international development "banks" that have not gained traction (eg, the Chiang Mai Initiative (early 2000s, in reaction to perceived inaction in resulting from the Asian Financial Crisis, and the BancoSur (2009) whose foundation was sparked by Hugo Chavez...).  What?!  You have not heard of those two international "banks", the Chiang Mai Initiative and the BancoSur?  They failed...  The BancoSur failed due to "internal contradictions", whoops, sorry Hugo Chavez...

The five BRICS members have relatively little in common other than they do not like the USA and Europe telling them what to do.  To me, the NDB and the CRA almost seem like political documents, despite their similar appearances to the World Bank and the IMF.

They have internal rivalries that are papered over (India and China have not straightened out their borders (although progress maybe has been made), China vs. Russia in the longer term have rivalry issues over Asia and resources, Brazil has stronger trade ties to the USA than to China).  Recall that China's economy dominates all of the others, that gives China a much greater influence over the NDB and the CRA than even the USA has over the World Bank and the IMF...

We will have to just wait and see.  The US dollar is not dead yet.  Each of the BRICS has substantial internal problems ("internal contradictions" for those of you schooled in Marxism) not often recognized by many observers.  There are contradictions between the members, although the anti-Western ideas shared among them may for now eclipse any such rivalries.

Here are two other insightful articles written recently on the "BRICS Bank":

http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/07/17/what-the-new-bank-of-brics-is-all-about/ (an excellent overview, albeit from the MainStream Media)

http://thedailybell.com/news-analysis/35498/The-Manipulated-Dialectical-Destiny-of-the-BRICS/ (a skeptical article from The Daily Bell, a libertarian internet newsletter)

We will just have to wait and see.  A snippet from The Washington Post article may sum the "BRICS Bank" initiative up quite succintly:

Presumably a BRICS bank and reserve fund will need to ensure a high-quality loan portfolio that maximizes developmental impact, but keeps defaults to a minimum (for expanding the scale of lending operations, it would also be important to make profits on its loans). And so the problem of surveillance will have to be tackled. Unfortunately, the track record of regional initiatives on surveillance does not bode well. 

Fun With Bitcoin For Beginners: Part Nine

This article will look at three topics:

1)  A very large number!  And other wallet matters
2)  How to create a blockchain.info wallet (the easiest way to get a wallet)
3)  A new service that allows you to buy Bitcoin ("BTC") with a credit card

***

Recently I was engaged with a BTC service which involved getting a new wallet.  I messed something up and then lost that wallet!  I then wondered if there was any cost (to me, or to the BTC Ecosystem) in losing or discarding wallets.

An example of discarding wallets would be someone very concerned about privacy who would use a wallet once (for one transaction), and then never using that wallet again (giving the owner more privacy, sort-of like the "One-Time Pad" in encryption in days gone by).

For this discussion, I will use a genuine BTC wallet that does not belong to me:

1BitmixerEiyyp3eTLaCpgBbhYERs48qza

The wallet belongs to the mixing service bitmixer.io.  Note that all BTC wallets start with a "1" followed by 33 other alphanumerics.  In this case, the eight letters following the "1" are part of a "vanity wallet" (similar to vanity license plates on cars), more further below.  What I am interested in looking at here is the NUMBER of possible wallets based on the fixed-length of a Bitcoin wallet ID.  Normally BTC wallets have a random string of alphanumerics, which is probably best (there have been some problems with those who have vanity wallet IDs...).  I have now looked at quite a few wallet IDs, and pass along the below remarks for setting up some arithmetic:

a)  26 capital letters + 26 capital letters + 10 digits = a theoretical 62 alphanumerics
b)  But, I have seen, No capital I's ("I"), NO capital O's ("O") and no small l's ("l")
c)  I have seen NO zeros ("0")
d)  This would yield some 58 alphanumerics, I may have missed something, so say 55

Note that these 55 characters can be used in any of the positions 2 - 34 in a wallet ID. So, we are looking for a number that would be approximately 55 to the 33rd power ("55^33"):

-- 55^2 (55 squared) = 3025 (first two characters after the "1")

-- 3025^2 (55^4 =  55 "to the fourth power") = 9,150,625  <- from here I will simplify by rounding

-- 55^8 ((55^4)*(55^4)) = approx. 81,000,000,000,000 (81 trillion)

-- 55^16 (81 trillion * 81 trillion) = approx. 6,561,000,000,000,000,000,000,000,000  (this would be 6.561 octillion, or (6.561 * (10^27)), a large number.

-- 55^32 ((55^16)*55^16)) = approx 43 sexdeciilion (aka sedecillion) or about 43 * (10^51)

-- 55^33 = approx. 2.365 septendecillion (2.365 * (10^51))  <-- (10 followed by 51 zeros)

Reference on large numbers here: http://en.wikipedia.org/wiki/Names_of_large_numbers

2.365 septendecillion is the largest number I have ever calculated on my own.  Keep in mind that I rounded DOWN and only used 55 alphanumerics (instead of some 58 or so).  So my number is almost surely too low!  But, even if I am off by a factor of 1000, that is still an extremely large number!

That would work out to about 300 duodecillion wallets for every man, woman and child on Planet Earth, so no worries if you lose a wallet ID (as long as there was no BTC in there)!

[Ed. Trivia Note, when I was some eight years old, our family dictionary listed numbers up to vigintillion or 10^63]

***

I briefly mentioned "vanity wallets" (vanity address) above.  There are services that will allow you to "make" (discover might be a better term) wallets with some of the first characters you would want.  Here's an article discussing this:

https://en.bitcoin.it/wiki/Vanitygen  <-- this shows some coding for programmers...

Here is one way to do it yourself (looks hard):

http://www.rentadesk.co.uk/blog/2013/4/2/how-to-create-a-vanity-bitcoin-address

There may be services that will do vanity addresses for you.  But, be careful!  Maybe just sticking to the random wallets is safer, and hides your own personal identity and safety a little better...:

http://www.reddit.com/r/Bitcoin/comments/21foj9/funds_currently_being_stolen_from_vanity/

***

In my Part Five (here: http://robertmixblog.blogspot.com/2013/12/fun-with-bitcoin-for-beginners-part-five.html) I explained how to get a wallet from MultiBit, a free program you can download that allows you to make wallets, receive and send Bitcoin, study transactions, change passwords, etc.  MultiBit requires downloading though, and some people don't like downloading programs that they are not familiar with, especially if your computer then asks you to download Java (by Oracle), which one of my computers did.

So, here is another way to get a BTC wallet that is easier yet apparently secure.  It is also free, and is done using blockchain.info, the respected Bitcoin service.  Some time ago, my source "Bitcoin Insider" ("B.I.") told me the following (words may not be exact):

There is a low but non-zero probability that your coins could be stolen. 

The way I interpreted THAT was "engineer-speak" for "low risk".  I am comfortable with the wallet (and its "spawn" as each time you use their sharedcoin.com mixing service it throws off a brand new wallet for you).  So, the below is a step-by-step procedure for having a wallet at blockchain.info.  Note that blockchain.info does NOT have your password!  You lose or forget your password, you LOSE any BTC in your wallet!

1)  Go to blockchain.info, you will get a page that looks like the below (*click* on any image for a better view), note the red oval I drew around the (faint) gray word "Wallet" near the top center:

2)  Click on "Wallet", and this page appears, next click on "Start a New Wallet" (inside my red oval):

3)  You will then get something very similar to this.  Fill out the fields with the green arrows (the email (first) is optional, but I did it, and then blockchain.info gives you a code that you can use instead of your wallet ID, see further down).  The fourth arrow is a "Captcha" (all you old-timers from ZH have seen this!) the Captcha is used to keep "robots" from misusing blockchain.info.  Note the red arrow!  Do not lose your password!

Upon finishing these steps and clicking the "Continue" (bottom green), you will arrive here:

Keep the above word string!  It will allow you to recover (somehow...) a lost password.  Then "Continue" and you arrive here:

Enter your Identifier, if you have done all of this on one computer it will likely already be entered for you (it is an alias, blockchain.info sends it to your email and then you enter your password).

And then you will arrive here (edited for privacy).  You will have a QR-Code as well as your new wallet ID right there!

You are now ready to go and buy or send BTC!  Of course, to send them, you need to BUY some first...

***

If you are lucky and know someone who will sell you BTC for cash, then you are good to go.  You can also try localbitcoins.com to try and find someone who will sell you BTC.  I have had "reasonably good" results with localbitcoins, but, alas, there just are not that many in my town who are out there with BTC for sale for cash.

But, there is a wonderful brand-new service that allows you to buy BTC by credit card (or debit card).  They charge a 5% fee "over spot" (my favorite (free) BTC price service is ounce.me).  Of course buying by BTC by credit card DOES leave a "digital trail", so those very concerned with privacy perhaps may not want to do this...  They now operate in eight states, go to their website to see if you are in the lucky eight:

trucoin.com

They require some hoops to jump through.  These include credit card info, a scanned ID (Driver's License) and probably some other things (same mail address as billing address, etc.).  But, the process is not onerous.  Here is their Home Page:

You have to sign up via a Google, Facebook or LinkedIn account.  Once you are "in the system" you are good to go.  Here is what I did just the other day:

Note that there is a friendly "Need Help?" blue button at bottom right.  I needed some help as I had "issues" with the process.  And note the $6.00 they tacked on as a fee, but that is not that much, if you factor in trying to meet someone "in town" and all that, the cost is pretty reasonable, IMO.

Once you you are in their system and you successfully complete a transaction, you will see a satisfying screen of "BTC pouring into your wallet", and when that is done, this will be your receipt:

Congratulations!  You will then be an owner of (more) BTC!

Fun With Bitcoin For Beginners: Part Eight

This article will look at securing and making Bitcoin (BTC) transactions more private.  There is some built in privacy even though all BTC transactions are recorded on the Blockchain (and so some of that information is available to anyone who is interested enough to look).

This article is in the same spirit as those about gold in that everyone who can should have some assets that are not easy to grab...  Even though BTC are not "off the grid" in one important sense (that BTC is very hard to use without the Internet), it is a place to put money (value) that is properly done is secure and reasonably private.

The two topics I will examine are using a computer not easily linked to you as well as other techniques using BTC itself to better conceal your ownership.

A pair of topics I will not address here are TOR and email encryption, these are both topics beyond my scope (at least for now).  Rumors also abound that TOR is not as secure as believed (that NSA has cracked TOR for example), I am not in a position to offer an opinion on that.

***

I read some months ago that buying a used laptop (at an anonymous place like a pawnshop for example) and then using the wifi at places you typically do not go is an effective tool to provide some privacy.

So, I went and bought a used laptop ($190 (included sales tax, paid cash) plus a $40 program I will use to clean up the garbage left on the hard disc).  That $190 included very little software, but I do not plan to use the laptop for my blogging nor data analysis uses...  I did not have to show any ID when I bought the laptop, nor did I get a receipt.  And of course I will not be downloading any nosy software...

What I have done with it so far is to establish another email account (only to be accessed with that laptop) as well as opening another BTC wallet.  There are two easy ways to set up BTC wallets:

1) via MultiBit (see: http://robertmixblog.blogspot.com/2013_12_01_archive.html)

2) via blockchain.info:

    a)  https://blockchain.info/
    b)  click on "wallet" (faint gray button at top): https://blockchain.info/wallet
    c)  start a new wallet (follow the easy directions: https://blockchain.info/wallet/new

Either will work fine with a "new used" laptop.  Both are easy to use.

Once you have a new wallet, NO ONE will know about it!  That's the beauty of using a laptop that no one knows about.  Then you find a way to get BTC into your wallet, preferably quietly...

***

Recall that one way to get BTC to a new wallet is to send some from another wallet that you own.  If you are going to bother trying to keep your BTC transactions from easy inspections (meaning that only relatively skilled and determined opponents would be able to see what you are doing) then there are two techniques that I have identified that will shield you to a degree:

1)  Mixing services (discussed at: http://robertmixblog.blogspot.com/2014/05/fun-with-bitcoin-for-beginners-part-six.html)  <-- Note that the link has a mistake in the title, this article is indeed "Part Seven" even though the link says "-part-six.").

2)  Use a "daisy chain" of wallets that will at least slow down and hounds on the trail.

I will now write about point 2 with a look at an example of a large and somewhat lengthy and complex set of transactions.  Complexity and length are likely to be your friends here!

Here is a hash code of a recent transaction (July 7) for about $135,700:

f85f743ed49d799f440061db8894f430bcf459aeb5290e49e96098a51cf40c12

Click that hash code into the search box at blockchain.info, and you will get this, *click* on image for a better view:

Now click on the "donor wallet" (sending wallet), 15NC2synrqTNymM4gbY85PWxq6Fcj87PKK.

Then keep clicking back on each donor wallet before that, and so on.  After clicking back through some 45 wallets (!), you will see various transactions along the way, each one sending a large amount and typically see many smaller amounts sent along, here is an example "along the way back":

Note that these transactions (all +/- 45 of them) all took place in just a few days (July 5 - 7).  Note that the two above transactions were about 30 minutes apart.  To keep "clicking back", click on the "donor wallet" each time.  You will get many pages of pairs of transactions just like immediately above.

I used the above set of transactions as an example of how to obscure a trail, I have no idea who this is, but here is what you get when you keep going back in time, have a look at the interesting transactions "at the end":

and

That last wallet (wallet ID starting with "16R14EH...") is involved in over 10 pages of transactions at the end, including the one just above for over $1,000,000.

So what?  Well, I am going to guess that the owner of those BTC owns all of the wallets, but imagine the work it would take someone to work through all of that.  Yes, the BTC wallet IDs are there, but to track down the origin and trail of the BTC "seems like" would be rather hard...

Now imagine combining the above technique (perhaps even harden it further by using only any wallet only ONCE) along with the BTC mixing services described in my Part Seven.

***

There are apparently other ways to "mix" your BTC.  Some of the exchanges allow you to send them BTC -- and then withdraw them at your leisure.  Once you get the BTC back they are already mixed.
  You would want to use an exchange that has no "Know Your Customer" ("KYC") regulations for BTC to BTC transactions (I have been told that there are one or more).  Note that all exchanges now operate under those KYC regulations if you want to receive or send CASH for BTC.

There are likely other techniques that I have not run into (beyond using the TOR network).  Many of the people involved in Bitcoin are are very bright and of a libertarian temperament.