One measure of the impact of cryptocurrency technology is the growing mindshare it occupies among policymakers. The past two weeks’ congressional hearings on the digital dollar are a case in point. There’s no way to talk about central bank digital currencies (CBDCs) without acknowledging the context fostered by the invention of cryptocurrencies – which are, in some but not all aspects, the polar opposite of CBDCs. Bitcoin tends to work its way into any public discussion about fiat digital currencies, if only to allow the likes of Sen. Elizabeth Warren (D., Mass.) an excuse to trash it.
The connection between the two might be much closer than either government officials or bitcoiners recognize, however. That’s the topic of the main column for this week’s newsletter.
This week’s Money Reimagined podcast explores how “blockchain thinking” around decentralized systems, incentives and resilience might help us reimagine insurance and risk management for threats such as ransomware attacks. For that, we talked to two outside-the-box thinkers.
The first is Dante Disparte. Best known in the crypto community as the former vice chairman of the Diem (formerly Libra) Association and currently as chief strategy office and head of global policy at Circle, Disparte has a long history as an insurance innovator via his role as chairman and founder of the Risk Cooperative. The second is Pindar Wong, the Hong Kong-based chairman of VeriFi. Wong is an internet pioneer who has become a leading Asian voice on how blockchain design principles can be applied to a new wave of internet-based digital economic models.
Have a listen after reading the newsletter.
Will the dollar rule the world? Or bitcoin? Or both?
Congressional hearings on a digital dollar these past two weeks were framed as an opportunity to advance financial inclusion.
That’s a noble objective. But let’s be realistic: This is about power.
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There’s a direct line between President Biden’s call, at last week’s Group of Seven meeting, for an alliance to counter China’s Belt and Road trade initiative and Washington’s growing interest in a digital dollar. China’s central bank digital currency is at the heart of its international ambitions, and some fear it poses a threat to the dollar’s status as the world’s reserve currency.
Many in Washington see the dollar’s dominance in terms of the enforcement power it gives U.S. regulators, who are able to track and control money flows in and out of U.S. banks, granting them unique capacity to impose sanctions on rogue actors and curtail the activity of criminals.
The problem is that this surveillance approach to monetary power is antithetical to financial inclusion. With identification and tracking at its core, the model imposes heavy burdens on the poor, who often don’t have access to the kind of ID systems, credit scores and other means of proving their eligibility for banking services.
What’s more, as speakers at the hearings highlighted, there are legitimate concerns about more extensive breaches of privacy when, armed with central bank digital currencies administered through a single centralized ledger, governments are able to monitor and control every person’s transactions.
So, it’s notable that two people who testified in favor of a digital dollar – Christopher Giancarlo, the former Commodities and Futures Trading Commission chairman and founder of the Digital Dollar Foundation, and Rohan Grey, a professor at Willamette University College of Law – called for robust privacy protections within whatever digital dollar solution the U.S. develops.
Grey wants a digital dollar that functions something like cash, as a bearer instrument that can pass from user to user without requiring a third-party recordkeeper to affirm the legitimacy of the payer, their balance or their right to make a transaction. Giancarlo argues that constitutionally protected privacy would make the digital dollar a more attractive currency for users worldwide than China’s digital yuan, which is expected to be subjected to heavy surveillance by the Chinese government.
Open-source money
How do you build such assurances into a project led by a government that has been shown to run surveillance on its own citizens?
Well, according to his response to a question from CoinDesk executive editor Marc Hochstein, Grey believes the model needs free and open-source software and hardware, as well as technology-neutral spectrum licenses (presumably for mobile wallets built on different device standards).
In the exchange that followed, Hochstein and others questioned how a U.S. intelligence community that’s built a pervasive system of financial surveillance would ever allow an open-source approach it can’t control. While Grey acknowledged that challenge, he stuck to his position that ultimately, public money is the purview of governments, not of decentralized protocols such as Bitcoin’s. In his words, “It’s important not to confuse skepticism towards altruistic expression of government power with the legitimization of the idea there’s another alternative” such as Bitcoin.
Grey says that only governments are capable of taking on the difficult governance responsibilities that come with issuing money and that we are best off lobbying Washington to take a more open, pro-privacy approach.
Not waiting for anyone
The thing is that developers of bitcoin and open-system stablecoins are pressing ahead, regardless. And as this process continues – with people increasingly moving money around the world in ways that bypass the U.S. banking system – Washington may have no choice but to work with that movement, rather than against it.
The outcome from that may even be quite favorable to the U.S. MicroStrategy CEO and outspoken Bitcoin advocate Michael Saylor told CoinDesk TV earlier this week that he thinks “the U.S. dollar is going to spread to 5 billion people” in a digital form that is “on every iPhone, on every Android phone and in every country in Africa and Asia and South America.” It’s just that this even-more ubiquitous “reserve currency of the world” will “move on Bitcoin rails.”
That last bit is the tough one to accept if you’re a fan of U.S. financial surveillance. “Bitcoin rails” means that the open Bitcoin protocol would be the settlement network for cross-border movements of digital dollars – in the form of privately issued and DeFi-based stablecoin tokens, rather than as an official U.S. CBDC. That could eventually mean that governments are no longer able to identify users.
It would render redundant the SWIFT network, the bank-led communication organization that currently enables the clearing and settlement of international bank-to-bank money movements. And if these digital stablecoin dollars circulate without ever being redeemed for banking system-based dollars, long transaction trails will occur without people ever engaging with a bank.
This model could be tremendous for the execution of U.S. ”soft power.” Having digital dollars everywhere will naturally benefit U.S. companies, which will be freed of exchange rate risk, and will drive demand for U.S. financial assets, including government bonds and T-bills held by reserves-based stablecoin providers.
On the other hand, it will mean giving up the “hard power” of being the world’s financial policeman, which will have far-reaching consequences for Wall Street and corporate interests tied into that system.
But while this soft power/hard power dichotomy seems like a trade-off, it doesn’t mean U.S. policymakers will necessarily get to choose the outcome. Saylor’s scenario could happen on its own, without Washington’s blessing, as crypto developers everywhere pick up the dollar stablecoin ball and run with it.
It’s good that U.S. congressmen are discussing these things, but while they talk, a new model for money is being built.
Off the charts: U.S. government left holding the bag
Wednesday’s meeting of the Federal Reserve’s all-important Open Market Committee signaled that the era of very low interest rates is coming to an end. With the economy bouncing back from the pandemic and the risk of inflation suddenly on everyone’s minds, the consensus is now that rate hikes will start toward the end of 2023, which implies the central bank will soon-ish slow its quantitative-easing (QE) policy that has underpinned everything from stocks to fine art to bitcoin.
Did those FOMC members notice the elephant in the meeting room? Namely: Trillions of dollars in newly issued COVID-era debt. How to address the economic drag from those future obligations, both government and of the private-issued debt, is the FOMC’s multitrillion-dollar question.
We’ve known since the 2013 “taper tantrum” that markets are addicted to Fed money. But now we face a bigger “cold turkey” risk: that a stock and bond market shock triggers economy-wide bankruptcies. Will growth ever be fast enough that debtors can afford sharply higher interest rates? Doubts about that are why many invest in bitcoin. The skeptics argue the government will have no choice but to absorb that debt, and because tax revenues won’t be high enough for it to meet repayments, the Fed will be compelled to monetize it. In what will be a real-world test of modern monetary theory, many see this as a route to dollar devaluation and much higher inflation
For context, let’s look at different measures of private and public debt relative to gross domestic product: total household debt, corporate debt, total federal debt and federal debt owned by foreign investors.
All four spiked sharply in early 2020. That’s partly because the GDP denominator shrank as lockdowns curtailed U.S. economic activity and partly because easier credit conditions enabled companies, households and the government to borrow more. Just as noteworthy: There was a subsequent correction in household debt, corporate debt and debt held by foreign investors later in 2020, whereas total federal debt held mostly steady.
One read on this: The U.S. government kept the economy from collapsing with stimulus checks, sector bailouts, employee retention loans, rent mitigation and so forth. In doing so, it shifted private debt to the public books.
A second takeaway: Lower foreign investor debt holdings set up an easier path to monetization. If the government is less dependent on foreigners to fund itself, there’s less concern about a sharp drop in the dollar exchange rate because most creditors are dollar-based anyway.
A third: Federal debt at 130% of GDP is far above the International Monetary Fund’s recommended 80% threshold. If that number were lower, it would be easier for the U.S. to grow its way out of this problem. But at these levels, we could be forever behind the eight ball. Bad news for the economy. Good news for bitcoin.
The conversation: Schiff show
Peter Schiff, a gold bug who’s also one of the most prominent bitcoin critics, has a family problem: His son, Spencer, is all in on BTC. (Spencer’s laser eyes Twitter profile says he’s a “Former goldbug, now a Bitcoin maximalist.”)
With the younger Schiff constantly taking his father’s anti-bitcoin tweets to task, Schiff Senior used the recent crypto sell-off to deliver a stern life lesson – in public:
Did the man-to-man talk work? Hardly:
Of course, Spencer knew Bitcoin Twitter would have his back. Here’s the aforementioned Michael Saylor responding to the elder Schiff with an own-retweet putting bitcoin volatility into a longer-term perspective:
Schiff Senior’s response: long-term gains don’t matter if short-term volatility destroys your leveraged position:
What many noted, though, is that Spencer’s investing strategy was quite conservative, at least compared to what is on offer in crypto land:
Time will tell who wins this family spat. In the meantime, Lolli CEO Alex Adelman has some other advice for the pair:
Relevant reads: China’s mining exodus
One of the most important recent trends in Bitcoin: Miners in China being pressured, with varying degrees of compulsion, to pare their operations. What began as a somewhat vague but ominous message from senior levels of the government has more recently translated into action at the provincial level.
For example, last week, as Nikhilesh De and David Pan reported, Qinghai province ordered all crypto miners to shut down.
And last weekend, after some initially confusing messaging from officials in the local government, David Pan confirmed that the province of Yunnan, while not instituting an outright ban, is cracking down on miners’ “misuse of energy.”
Not surprisingly, a drawdown in a place that hosts more than half of bitcoin’s mining capacity has real-world implications for the network. For one, as Frances Yue reported, the bitcoin hashrate, a measure of total computational power in the network, dropped to a six-and-a-half month low this week.
However, what’s bad news for Chinese miners is good news for miners in North America, which is expected to see a mass relocation of mining operations. It’s good timing in particular for Canadian miner Hut 8, which as Jamie Crawley reported, will be listing its shares on Nasdaq.
