The Breakdown - CBDCs Aren't About Money, They're About Power

Episode Date: May 9, 2021

On this week’s “Long Reads Sunday,” NLW reads Sune Sorenson’s “China Is Opting Out of US-Run Financial System.” He also discusses recent pieces by Niall Ferguson and The Economist that point to a growing conversation about CBDCs that is fundamentally about power and the global system.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, neared.org, and Genesis Trading, and produced and distributed by CoinDes. What's going on, guys? It is Sunday, May 9th, and that means it's time for Longreads Sunday. First up, however, a big happy Mother's Day to all of you mothers out there. especially Jesse the mom to our two little blighters, we literally would not make it through without you. But let's now talk about CBDCs. The central thesis of this episode is that CBDCs aren't about money, they're about power. That thesis will be obvious to many of you, certainly those who have listened to me

discuss why China is so keen to get a CBDC, and why the U.S. is comparatively slow moving. Today's LRS selection puts China's motivation clearly. It's by Soon Sorensen and it's called China is opting out of the U.S. run financial system. So let's read it and then we'll talk a little bit more about power. China is opting out of the U.S. run financial system. If the U.S. government doesn't lead financial innovation, China will leapfrog it and control the world's emerging monetary infrastructure. An ancient Chinese proverb states that the man who moves a mountain begins by carrying away small stones.

China has perfected that. that, like no other nation, and has been working to create the infrastructure to leapfrog to global reserve currency status by innovating building and controlling the plumbing of a competing global financial system. Digital currencies are a key part of this great game. The U.S., with Securities and Exchange Commission Chairman Gary Gensler and the lead, has taken notice and it's finally beginning to stir. Gensler once told NPR, quote, markets work best when there's a cop on the beat. His observation speaks to the competition among international central banks, but it's the People's Bank of China, the PBOC, that may ultimately become the one and only

unofficial cop monitoring and influencing global financial flows. The current global financial system is managed by Wall Street and the Washington Consensus. China wants to have more control over its destiny by using other currencies in a cross-border digital world. Wang Shin, director of the PBOC's research division, stated, quote, if the digital currency is closely associated with the US dollar, it could create a scenario under which sovereign currencies would coexist with U.S. dollar-centric digital currencies. But there would be, in essence, one boss, and that is the U.S. dollar in the United States. If so, it would bring a series of economic financial and even international political consequences. China's recent announcement to join the Central Bank Digital Currency Bridge Project

demonstrate its willingness to design a world without the U.S. dollar supporting it. While China eclipses the United States in the space race for digital currencies, could that be a Betamax versus VHS scenario of incompatible, financial systems. The world may depend on the U.S. dollar presently, but the world may switch to another currency under China's influence. If the U.S. government doesn't lead private public partnerships encouraging financial innovation, then China will leapfrogate and control the world's infrastructure. Despite unresolved banking system issues, the Chinese have applied former European Central Bank president and current Italian Prime Minister Mario Draghi's dictum to do, quote,

whatever it takes to their administration of national and potentially international financial affairs. The Chinese know that the financial fishbowl built by the West decades ago lacks the legacy control over the future flow of the world's money. An old Chinese proverb says, If you want to know what water is, don't ask the fish. If members of the dollar-denominated financial world are the fish, then fresh perspectives are needed to unseat the PBOC's advantageous position in global markets. Looking for the best way to unlock your crypto's liquidity,

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for insights from the firm gathered from across their spot trading, derivatives trading, lending, custody, treasury, and prime brokerage business lines. Visit genesistrading.com today to learn more. For decades, China has worked on alternatives to the Western-dominated Swift system and has sought to obtain a more powerful position within global financial governance institutions, such as the International Monetary Fund. Recently, it has given its fintech industry massive support, effectively putting it in a commanding emerging markets position. Access to payments grants the Chinese government unprecedented access to citizens' buying decisions and taxable wealth. China's aggressive push into CBDCs is the next step in the process of establishing a credible alternative

to the euro in the east and dominance of regional finances. In short, China has taken a number of actions to put it in position at the forefront of the global fintech revolution, actions that require a coordinated and consistent response if China is to be prevented from influencing the global financial infrastructure in a direct manner. China testing digital currency. also said, quote, the PBOC sees itself in a race with the United States on digital currency. He added, we had an early start, but lots of work is needed to consolidate our lead. The intent of the People's Bank of China's Central Bank digital currency, often referred to as the digital yuan, is to offer an alternative to cash. A leader in cashless payments, China

is testing the digital yuan in real-world trials in Shenzhen, Chengdu, Su Zhao, and other cities, while experimenting with the idea of expanding use to international athletes and visitors at the 2022 Beijing Winter Games. While China systematically goes about its business of implementing a fate accompli in developing the next global financial system, many world governments and regulators are missing the forest for the trees. These governments tend to see the broader digital currency and asset market as a silly play thing of millennials or are overreacting, and focusing on slamming the barn door shut long after the horse has bolted. The Chinese government, on the other hand, has always encouraged monetary innovation with the goal of improving daily transactions

for its citizens and monitoring the national economy. China's alternative to SWIFT. Crypto assets with international use cases have garnered attention, but the general manager of the China Securities Depository and Clearing Corporation pointed out, quote, a unified payment platform is easier to achieve than a unified global digital currency, which will find it harder to get a foothold. According to a report from the Bank of China, the potential exists for the United States to cut off access the Chinese bank's dollar settlements. That could lead to China halting U.S. dollar use as the anchor currency for its foreign exchange controls. Meanwhile, use of the cross-border interbank payment system will increase if international transactions of China's national digital currency

bypasses swift. The development will in turn make it easier to avoid U.S. financial sanctions while reducing exposure of China's global payments dated to the U.S. China wants to manage its national debt effectively as well as monetize international industries and resources in the brave new world without U.S. imposed restrictions. The late economist John Maynard Keynes once wrote, though in the ideal Commonwealth, men may have been taught or inspired or bred to take no interest in the stakes, it may still be wise and prudent statesmanship to allow the game to be played subject to rules and limitations. The Chinese know that writing new rules influences establishment of the new world order. All right, back to NLW here. And so there's a bunch that we could talk about with regard to this

specific piece. I think there's a big question of the characterization of China supporting its fintech. I think it's trying to totally absorb its fintech. In fact, I think fintech is its first enemy with the dollar as its second-tier enemy. I also think there's a whole conversation about the realism and the real politic questions of how much people would be willing to adapt a Chinese digital currency standard. However, the place where Sun and I completely agree is that this is the motivation for China, that they are not playing a short-term game that's just about their own domestic economy. They are playing a long-term game that in their mind ends with China in the economic catbird seat via the rest of the world. Interestingly, this wasn't the only thing about

China and CBDCs written this week. Neil Ferguson wrote a piece called the China model. Why is the West imitating Beijing? It's about much more than just CBDCs, but they do get a mention. Here's the line. Quote, and let us not forget those who urge the Federal Reserve to hurry up and devise its own version of China's central bank digital currency, seemingly unaware that the primary goals of the yuan are to tighten the CCP's surveillance of financial transactions and to reduce the power of the electronic payments platforms built by the Chinese tech giants Alibaba in Tencent. Despite Federal Reserve Chair Jay Powell's obvious lack of enthusiasm, he is under growing pressure to follow the Chinese lead. Already the Bank of England is forging ahead with its own CBDC task force.

Christine Lagarde, the president of the European Central Bank, envisages an E. Euro in around four years' time. It is one thing to compete with China. I firmly believe we need to do that in every domain, from artificial intelligence to COVID vaccines. But the minute we start copying China, we are on the path to perdition. Now, as if to reinforce Ferguson's point, the economists put out a just cloying article, cover story even, about the coming central bank digital currencies. And it reads like a pedantic adult glad that these private cryptocurrencies are going to be swept off the map by the eager overlord of the state. Suffice it to say, this theme was picked up by many on Bitcoin Twitter. Alex Gladstein tweeted,

Get Ready for the Fed coin and the E Euro cheers the economist, which hype CBDCs as more revolutionary than Bitcoin. They will shift the power from individuals to the state and are to be treated with optimism. When did this magazine get so authoritarian? Nick Carter said, Western central bankers fall all over themselves to praise the Sino-CbDC,

but such a thing is incompatible with a free society. Jeremy Allaire, the CEO of Circled, writes, The entire ivory tower, top policy leaders and major media editorial board and think tanks have all been parodying the idea that the U.S. should try to out-China-China with CBDC. This is a disastrous and frankly un-American strategy. The U.S. and much of the West has thrived on open networks, open innovation, open intellectual property development, private sector-led technical innovation, open-source technology innovation. It's created incredible and competitive

companies. Instead of having China envy, the West should embrace this model and understand that private sector-led digital currencies, open, permissionless blockchains, open and competitive markets, are the basis for preserving a global system built on freedom, democratic principles. It's how the global commercial internet was built and thrived, and it's how our new global economic system is being built block by block. The reason that I spend so much time on CBDCs is that, one, I believe them to be 100% inevitable. There is too much power in them, too many benefits, too much convenience for citizens. going to happen. Period. Full stop. End of story. Second, I believe that decisions that seem small

about how they're designed could have enormously far-reaching implications, particularly around things like privacy. Third, I think there are very important American values that could either be reified or completely undermined with how we decide to design a digital dollar, values that ultimately all come back to some part of sovereignty. And four, I believe that there will never be a better time to try to shift the conversation than now. Every design element that gets locked, every path that we put ourselves on officially restricts the band of future opportunities.

If you care about the way that a digital dollar is designed, now is the time to say so and join the conversation. With that, guys, I'll wrap. I hope you're having a great weekend. I appreciate you listening, as always. Until tomorrow, be safe and take care of each other. Peace.

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