Digital Yuan
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Well, there’s this, from Bloomberg Opinion, a couple of days ago:
“Little is known about the digital yuan except that it’s been in the works for five years and Beijing is nearly ready to roll. The consensus is that the token will be a private blockchain, a peer-to-peer network for sharing information and validating transactions, with the People’s Bank of China in control of who gets to participate. To begin with, the currency will be supplied via the banking system and replace some part of physical cash. That won’t be hard, given the ubiquitous presence of Chinese QR code-based digital wallets such as Alipay and WeChat Pay. It may start small, but the digital yuan can disrupt both traditional banking and the post-Bretton Woods system of floating exchange rates that the world has lived with since 1973.”
And then there’s this from Fortune magazine a couple of weeks ago:
“The U.S. government has no federal policy on blockchain technology, nor has President Donald Trump publicly espoused its importance, as Xi (has done). A six-hour congressional hearing back in October on Facebook’s blockchain-powered digital currency Libra — the most prominent showcase yet of U.S. officials’ attitude towards blockchain — did not go well. The House Financial Services Committee bombarded Facebook’s Mark Zuckerberg with questions that revealed their skepticism of the embattled tech company and its founder, and voiced concerns that Libra would challenge the U.S. dollar in the global financial system. Libra has since languished in regulatory limbo.”
And then there’s Jay Powell on the subject (courtesy of the Financial Times):
“Federal Reserve chair Jay Powell warned that Facebook’s planned cryptocurrency, called Libra, cannot move forward unless the social media group resolves “serious concerns” about the project. “Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,” he said during testimony in front of the US House of Representatives Financial Services Committee. “These are concerns that should be thoroughly and publicly addressed before proceeding.” The Fed and the US Treasury’s Financial Stability Oversight Council are looking at Libra, according to Mr Powell. Officials from the central bank met with Facebook a couple of months before it announced its Libra plans. “The process of addressing these concerns should be a patient and careful one, and not a sprint to implementation,” he said.”
In other words: committee meetings! Ones that will address “serious concerns” and be “patient and careful” and not allow anything as irresponsible as “a sprint to implementation.” It all sounds like a New York Times Editorial; serious-minded, carefully crafted, clueless.
Ask yourself this question: What are the chances of Silicon Valley not disrupting the financial system? Answer: “none.” Ask an expert this question: What are the consequences of holding Silicon Valley in regulatory abeyance and allowing China to take the lead in the race to establish a global digital currency? Harvard University economist Kenneth Rogoff answered (at least part of) the question as follows:
Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America’s ability to leverage faith in its currency to pursue its broader national interests. Libra is probably not the answer to the coming disruption posed by government-sanctioned digital currencies from China and elsewhere. But if not, Western governments need to start thinking about their response now, before it is too late.
“Before it’s too late,” here’s where we are:
(1) “The crypto yuan, which may be on offer as soon as 2020, will be fully backed by the central bank of the world’s second-largest economy, drawing its value from the Chinese state’s ability to impose taxes in perpetuity.”
(2) It will be a global currency.
(3) The Fed and the US Treasury will have a lot of meetings on the subject of digital currency. which will in turn generate more meetings on the subject.
(4) Congress will hold a lot of committee hearings, which will allow some members of Congress to be seen on cable television news programs.
(5) The White House will introduce a “middle class tax cut” in advance of the 2020 election.
(6) Libra is a work of genius, Facebook will continue to improve Libra’s architecture and algorithms and its Libra project may well be derailed by the US government.
(7) Some country will eventually wake up to the biggest opportunity in its history and enter into a partnership with Facebook to roll out a new global currency.
Of these seven items, only one (#7) is outright conjecture.
Assuming China does “unveil” a digital yuan in 2020 or 2021, then the race to become the denominator of global finance is officially and quite publicly underway. Happily enough, the US begins the race with huge advantages; “incumbent status,” established legal recourse, embedded financial “software,” global military presence, etc. China has a lot of ground to cover to overcome these advantages, and it’s an uphill climb.
That said, those advantages are not decisive. And (relatively) recent developments — the US withdrawal from the Trans Pacific Partnership, the Belt and Road Initiative, to name two — give China a distinct regional advantage in Asia, where the infrastructure for distribution of the digital yuan is largely in place. (WeChat Pay and Alipay are already on millions and millions of mobile devices across the region. Adoption will be accelerated by reduced transaction costs and ease-of-use).
US officialdom seems unconcerned about China’s digital currency challenge. Nonchalance will eventually give way to alarm. And that will in turn beget calls for an inventory of “where do things stand?” and answers to “what do we need to do?”
Here’s one elephant-in-the-room question: if the race is on to build out a global digital currency, who is going to build the platform for that currency for the US government? The Fed? The Treasury Department’s Financial Stability Oversight Board? The White Council of Economic Advisors? The US Mint? The answer, obviously, is, “none of the above.”
So who’s going to do the work? The Feds could hire Facebook, which has already done much of the work and employs the smartest people in the world in “fintech.” And since a digital currency will necessarily require the application of the most advanced Artificial Intelligence, hiring Facebook makes even more sense, because it is, along with Google, the most advanced AI company in the world. To make the case for Facebook all the more compelling, it has a global user base; 1.6 billion people (~20% of the world’s population) are “daily average users.” In theory anyway, each and every one of those “daily average users” could have the Libra app (“Colibra”) on their mobile devices.
Alternately, the US government could hire a consultancy, like McKinsey, who in turn would partner with a Big Tech company like Microsoft or Oracle or Amazon or even Palantir, to work around the clock to try to catch up with Facebook, which they probably won’t, because Facebook is to far ahead. As far as anyone knows, no agency of the US government has put out an RFP (Request For Proposal) for a US digital currency platform build-out.
In fact, for the moment anyway, the Trump Administration, the US Congress, Democrats and Republicans of all persuasions, attorneys general from 50 states and various local, state and federal regulatory agencies are doing everything they can to make the future of Facebook’s Libra project as difficult and uncertain as possible. One suspects this will continue, unabated, throughout 2020.
Which is crazy.
The quickest and surest path toward preserving US hegemony in global finance is this: The Federal Reserve partners with Facebook to introduce a new digital currency called USD Libra. Alongside the incumbent infrastructure of US Dollar-denomination that exists throughout the “analogue” global financial system, USD Libra enhances and expands US domination of global finance. Transaction costs around the world are dis-intermediated, thus saving consumers hundreds of billions of dollars every year. US hard and soft power grows even more formidable (and, if need be, menacing). An added benefit is that economic growth is stimulated by a USD-based digital currency, since it generates its own monetary easing. Winners all around.
It probably won’t happen. And as a result, we’ll be betting the farm on China making a mess of it.
