The Breakdown - Here Comes ‘Britcoin’

Starting point is 00:00:00 Just because the concerns around CBDCs sound wild and extreme doesn't mean they're not justified. Or at least, and this may be the more salient point, doesn't mean that they're not worthy of explicit and loud discussion now, such that the political pressure on the people in power to decide about CBDCs feel like they must address these concerns in a serious way before any CBDC is actually created. 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 produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, February 8th, and today we are talking Bitcoin. A quick note before we dive in, there are two ways to listen to the breakdown.

Starting point is 00:00:47 You can hear us on the Coin Desk podcast network feed, which comes out every afternoon, and features the breakdown alongside other great Coin desk shows, or you can listen on the breakdown-only feed, which comes out a few hours later in the evening. Wherever you listen, I would so appreciate it if you would take the time to leave a five-star rating or a review, it makes a huge difference. All right, with that out of the way, let's dive into our topic today. Yesterday, Lawrence, who goes by at Function Zero on Twitter, wrote, If the UK launches a digital pound and the media calls it Britcoin, I'm going to get on national television and ad lib an entirely new Unabomber Manifesto. Sorry to Lawrence, because I am absolutely borrowing this because it is 100% happening.

Starting point is 00:01:26 However, before we get into Britain's potential CBDC, a quick follow-up from yesterday. Yesterday's show was all about the Fed's hawkish walkback. The Fed deployed Governor's Bostic and Keshkari to use the much hotter-than-expected jobs report from last Friday as context to reinforce the idea that we might need more rate hikes. And what's more, it seemed like the market was getting the memo, finally pricing out any rate cuts for the end of 2023, which it had been stubbornly holding on hope for. Still, as I mentioned then, the real question was what Powell would come out and say in his interview at the Economic Club of Washington with David Rubinstein later in the afternoon.

Starting point is 00:02:02 Would he bring the hawk hammer and really enforce the tonal shift from last week, or would it be more muted? Roughly the conventional wisdom going in was that he would use the appearance as a chance to, if not go full hawk, still claw back a bit of hawkish credibility. However, there were some like Funstrat who said, nah, he's going to stay dove. And I think Net Net, it was a bit closer to the Funstrat, point of view. So, as we said, Fed Chair Jerome Powell attended the Economic Club of Washington on Tuesday for a sit-down interview with David Rubinstein, and in a lot of ways, this was just a

Starting point is 00:02:32 flushing out of comments he made at last week's FOMC. Specifically, he said that the disinflation process had begun, but there was still a lot of work left to do to bring inflation down to the Fed's 2% target. Importantly, he once again avoided the opportunity to aggressively job-own markets lower. He didn't walk back comments on financial conditions still being tight, even though it appears to the market that they've gotten much looser. Instead, he preferred to express a lack of certainty that inflation had begun a broad base in sustainable decline. Of course, the payroll data question was top of mind. In discussing what that meant, he said, we think we are going to need to do further rate increases. The labor market is extraordinarily strong. It underscores the message

Starting point is 00:03:09 I was sending at the press conference, that we have a significant road ahead to get inflation down to 2%. I think there's been an expectation that it will go away quickly and painlessly, and I don't think that's at all guaranteed. The base case for me is that it will take some time, we'll have to do more rate increases, and then we'll have to look around and see whether we've done enough. Powell again highlighted the stubbornly high inflation in non-housing services, which is uniquely sensitive to wages as the primary roadblock to the Fed achieving its inflation mandate. He reiterated that the 2% inflation target is firm, and presented his guess that it would take, quote, certainly into not just this year but next year to get down close to 2%.

Starting point is 00:03:43 He also touched on the issues that have shown up with economic modeling methods such as the data challenging long-held theories of central banking. This includes the correlation between labor markets and inflation known as the Phillips curve. Powell said, quote, the labor market is strong because the economy is strong. It's a good thing that we've been able to see the beginnings of disinflation without seeing the labor market weaken. There's now a shortage of workers. It feels more structural than cyclical, so that's an issue. He also, over and over again, reinforced the idea of a data-driven Federal Reserve that is waiting to see where the economy goes next. This cycle is different from other cycles, he said, because of where

Starting point is 00:04:15 it came from. It's just confounded all sorts of attempts to predict what it will do. Now, as you might imagine, markets were obviously listening intently to every word from Powell, and stocks, bonds, and the dollar all whipsawed throughout the discussion. During the interview, the S&P 500 first rose by 1.64%, dropped 1.81%, and finally pumped by 2.16%, closing the day up 1.29%. Jim Bianco of Bianco Research wrote, Are we getting comfortable with this? Because if we are, it can be ratcheted up to another level. Jan Wustenfeld said Powell on a mission to liquidate both shorts and longs during his press conference. All in all, I think this is a big vote for my argument last week that Powell firmly has his

Starting point is 00:04:54 soft landing in sight, and that's where he's steering the plane. Bank of America's Mike Gapen says Volker has left the building. The Fed is embracing painless disinflation and hope it continues. We're not in Wyoming anymore. Wyoming, of course, in that case, refers to the Jackson Hull speech where Powell stamped all over the late summer rally last year. Now, this is definitely a tightrope for Powell. It's important to note that by not staying hawkish, he's taking a huge risk. and constraining his options. What I mean is that in many ways, the more dovish he gets, the harder it is for him to go full hawk again. Now, he's trying to give himself the out of saying data-driven, data-driven, data-driven, so if there's a hint of inflation going back up,

Starting point is 00:05:33 the Fed is trying to leave itself open to go 50 basis points or higher again. But still, something that would be really hard. Mark Andre Fongren writes, one thing is crystal clear. In case the Fed is forced to return to hiking rates by 50 basis points, their credibility will be absolutely massacred. At this point, there's more at stake than people are willing to admit. Still, there are many who think that that credibility is less important than the actual outcome. Carlo Cassio writes, everyone needs to understand that financial conditions are back to being accommodative in the U.S. and elsewhere. With unemployment at the tightest in 50 years and core services inflation sticky, that's the worst policy mistake of the last 50 years.

Starting point is 00:06:09 Now, one final note on this before we move on to our CBDC topic, I do think that part of what's lost in the market's desperate need to figure out the short term is important to be. debates about these larger structural forces, which clearly Powell is thinking about too. DC investor nails this in his tweet, what if unemployment stays structurally low for the next five years, regardless of Fed rate rises, not because of a particularly strong economy, but simply because boomers are leaving the workforce at such a significant rate. Anyways, all of this continues to be very interesting, but let's turn to our main topic,

Starting point is 00:06:38 Britcoin. The UK Treasury and the Bank of England are expanding the discussion of a retail CBDC, inviting public comment on a consultation paper released on Tuesday. Ahead of the release, the Treasury and the Bank of England, released a joint statement saying that, quote, on the basis of our work to date, the Bank of England and HM Treasury judge that it is likely a digital pound will be needed in the future.

Starting point is 00:06:58 It's too early to commit to build the infrastructure for one, but we are convinced that further preparatory work is justified. End quote. The consultation is designed to inform the decision around whether or not to build the infrastructure for a digital pound, with a pilot test not anticipated before 2025. While many of the design features are up for debate, UK authorities are certain of one thing that they don't want the digital pound referred to,

Starting point is 00:07:20 exactly as I'm referring to it here as Bitcoin. Bank of England Deputy Governor John Cunliff said at a speech launching the consultation, quote, The digital pound can be confusing in people's minds with crypto assets, such as Bitcoin. I should take this opportunity to correct this misapprehension. Indeed, nothing could be further from the truth. Now, the paper goes into the many risks of launching a retail CBDC, ranging from privacy risks to the risk of bank runs crippling the financial system should the CBDC out-compete commercial bank deposits. Overall, the consultation is one of the more complete and open attempts to publicly talk through the pros and cons of a retail CBDC we've seen

Starting point is 00:07:53 from a government to date. One note from the proposal that has captured many headlines is a proposal that would cap citizen CBDC holdings somewhere in the 10,000 to 20,000-pound range to, quote, strike an appropriate balance between managing risks and supporting wide usability of the digital pound. This limit would allow a majority of UK wage earners to take their salary in the CBDC, but would still create competition with commercial banks. The digital pound would also offer no interest allowing banks to easily offer competitive terms on deposit accounts. Now, one of the concerns articulated is that a CBDC could accidentally destabilize the commercial banking system. Currently, banks use deposits as a cheap form of funding for loans. Without that flow

Starting point is 00:08:31 of deposits, banks could increasingly find themselves reliant on more expensive wholesale markets, driving up borrowing costs for users. In a particularly acute scenario, a bankrunner of citizens flocking to the safe haven of digital cash could undermine the capital base for the commercial banking system. Similar concerns were raised informally by Federal Reserve officials during the discussions of U.S. CBDCD last year. There are also many privacy and consent concerns written into the consultation. When considering how programmable the currency should be for functions like smart contracts or automatic taxation, the paper said, quote, the BOE will not implement central bank-initiated programmable functions. Instead, the BOE would provide the necessary infrastructure for the private sector to

Starting point is 00:09:09 implement programmability features for users. Those features would require user consent. The concern, which we'll get into more in a little bit, is that programmability could change the nature of money as a freely exchangeable good. The paper also went to pains to set out a goal of maintaining privacy, stating, quote, the digital pound would have at least the same level of privacy as a bank account, and would also allow users to make choices about data use. It suggested that although accounts would not be anonymous, neither the government nor the BEO would have access to personal data, with police access only allowed on a, quote, fair and lawful basis. basis. On the technology side, the paper appeared to be undecided on whether the distributed

Starting point is 00:09:43 ledger technologies present in public blockchains would be appropriate. It pointed out that although the technology, quote, might have advantages in guaranteeing consistency and resilience, they also presented, quote, privacy, scalability, and security challenges. So given all these potential problems, what positive reason to issue a CBDC was presented. It seems to be simply an assumption that a safe and stable way to use money online is in demand. Finance Minister Jeremy Hunt said in a statement, while cash is here to stay, a digital power. issued and backed by the Bank of England could be a new way to pay that's trusted, accessible, and easy to use. The press release for the paper said that the digital pound infrastructure

Starting point is 00:10:17 would allow firms to, quote, design innovative, user-friendly services, and handle all customer-facing interactions. One final element of note from the proposal is the sense of needing to keep up with rival governments. The European Union has been conducting a similar consultation period, which will conclude this year, and articulated a very similar set of design principles for a digital euro. BUE Deputy Governor again John Cunliff said the proposals set out today, are designed to ensure that the UK is well-placed to take advantage of the benefits that these changes can offer, while ensuring that we preserve the safety and uniformity of money in the UK. The public consultation process will be open until June 7th.

Starting point is 00:10:54 Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code Breakdown to get 15% off your paths. Visit Consensus.coindex.com or check the link in the show notes. While the Bank of England is pondering the risks and benefits of a CBDC, India is plowing ahead. The Reserve Bank of India launched two pilot programs late last year, one focusing on a retail

Starting point is 00:11:42 CBDC and the other exploring a wholesale CBDC used exclusively for interbank settlement between financial institutions. The Indian government has said it hopes to launch its CBDC at the national level by the end of this year. The retail CBDC pilot was initially conducted across four cities with four major banking partners, and according to a senior official, it has now been extended to 15 cities. Unlike many of the CBDC pilots that are ongoing, India has so far not collaborated with any international central banks to test remittance payments and cross-border banking settlement. According to sources who spoke with CoinDesk, there are competing agendas behind the push to launch a digital rupee. Publicly, the RBI has a stated goal to provide the option of digital money that is easier,

Starting point is 00:12:19 faster, and cheaper to use than existing payment rails. Privately, India's geopolitical motivation is to, quote, counter the dollarization of the global economy. An official working on the CBDC project said, in the context of the internationalization of the Indian rupee, an Indian CBDC will make it easier for the nation to get international acceptance because it is digital. For emerging markets, it is a good weapon to have so that in the future, when we are looking for internationalization, this can be one good help. The Indian CBDC program also appears to be much more comfortable with the idea of programmability

Starting point is 00:12:48 than other governments. An official told CoinDesk that tokens distributed as part of a government subsidy might be locked so they can only be spent on appropriate goods. Quote, we are looking at various other use cases like offline payments and programmability. And based on the outcome of our experimentations, we will have the best CBDC with the best features. At the base of it, the geopolitical stakes are clear for India. This year, India will overtake China as the most populous nation on Earth and has demonstrated a desire to remain an independent third-party nation to the geopolitical strife of the last year. With China a much more

Starting point is 00:13:19 direct and comparable geopolitical rival, the need to keep up with payments technology is much more present and direct than is felt by, for example, politicians in the U.S. who feel comfortable with the dollar's world reserve status. Although the rhetoric around the decline of the dominance of the U.S. dollar has dulled somewhat in recent months, this era has presented the most heightened difficulty for maintaining sovereign currency we've seen in decades. India is clearly attempting to use every tool at its disposal to ensure that the rupee is a relevant currency in the decades to come. So you can see in these two examples just how different the CBDC discussion is in emerging markets and emerging political powers as compared to the old established Western powers.

Starting point is 00:13:58 Still, it's worth taking a pause here to ask what possible reasons for a CBDC a government might have, as a way of trying to divine what any particular government might be more or less interested in. One view is that CBDCs are a response to the rise of non-sovereign monies like cryptocurrencies that aren't controllable by governments. I think that for the large Western economies, there is a fair amount of confidence, hubris, even, that Bitcoin and its ilk are never likely to challenge government money. However, in places like India, it has been explicitly part of the motivation to offer cryptocurrency-like features, but with a government-issued money. Another motivation for CBDCs is the rise of fintech payments, which could be an unpredictable force

Starting point is 00:14:33 for financial systems in the future. On the one hand, they could be a force because certain platforms like Apple Pay become so large they are effectively banks, but they could also become challenging because as people get more comfortable leaving their money deposited in various accounts split across their mobile experiences, they become all sorts of questions of solvency. I think it's worth noting that as China ramped up their CBDC efforts, the first thing they clamped down on and got in line wasn't crypto. It was AliPay and the fintechs in that country. Remember that the expected November 2020 IPO of Ant Financial was cancelled by the Chinese government. After that, Jack Mael basically wasn't heard from for about six months, and Ant Financial

Starting point is 00:15:08 was forced to restructure in a way that got it in line with Chinese state-owned banks from a regulatory perspective. Obviously, one wouldn't expect private sector fintech to pose quite such a threat to the U.S. or the U.K., but their presence is a new force nonetheless. Speaking of China, another possible reason that has often been cited when it comes to a CBDC is a need to keep up with China. When it comes to a place like India that is a direct regional rival, some of that reasoning is probably clear. However, when that's brought up in a place like the UK or the US, the logic tends not to bring with it an argument for exactly what reason to keep up with a China CBDC is so pressing. In other words, is it just because China's doing some

Starting point is 00:15:44 technology thing that we need to keep parity? Or is it more specifically an argument that the functional features of a Chinese CBDC are going to make it much more useful and thus more demanded in various global exchange contexts. These are the important questions to ask, as keeping up with is a little too vague to really sink one's teeth into. And then, of course, also speaking of China, there is the surveillance motivation. It is quite clear that that's a huge part of it for the command and control CCP. And one of the great fears of liberty advocates in places like the U.S. and the UK is that whether or not the government says they want that, and they keep going to pains to say they don't, it is such an inborn property of CBDC systems that the temptation of abusing the surveillance

Starting point is 00:16:22 will be extremely high. And then there's the question of programmable money to become a tool for government's projecting rules on what people can and can't spend their money on. Silky Carlo, the director of the Big Brother Watch in the UK, pointed to 2021 comments from John Cunliff of the Bank of England when he said, quote, there's a whole range of things that programmable money could do, like giving the children pocket money but programming the money so it couldn't be used for sweets, end quote. And there's an even more simplified version of this. Think incentivize spending. In other words, government stimulus that has to be spent within a certain time where it disappears.

Starting point is 00:16:54 Yaffir Ali tweets, friends, I'm seriously asking if I'm missing something. Regarding the UK's announcement that they will, quote, stop hoarding of digital pounds. If CBDC replace pounds, wouldn't this mean that they will force spending rather than savings? Sounds dystopian, I must be missing something. Now, my general feeling with CBDC discourse is that, on the one hand, the critiques and concerns are often going to sound totally disembanking. and even, depending on who is sharing them, kind of unhinged, like a conspiracy theorist dream. But at the same time, I don't think that that will mean that we should ignore those concerns. I think of the famous line from Catch22, popularized later by a Nirvana song,

Starting point is 00:17:31 just because you're paranoid don't mean they're not after you. Just because the concerns around CBDC sound wild and extreme doesn't mean they're not justified. Or at least, and this may be the more salient point, doesn't mean that they're not worthy of explicit and loud discussion now, such that the political pressure on the people in power to decide about CBDCs feel like they must address these concerns in a serious way before any CBDC is actually created, or in the decision of whether or not to do so. Anyways, guys, as I've said for a couple years now, I think the CBDC conversation is going to do nothing but get more and more significant politically. We've yet to really see the follow-up from Biden's executive order on exactly that,

Starting point is 00:18:10 but I wouldn't be surprised if a little bit more of that comes to bear this year. Anyways, hopefully this was an interesting update on a couple of different versions of that conversation. As always, I appreciate you guys listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Here Comes ‘Britcoin’

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