The Breakdown - Is Bitcoin a Chinese Financial Weapon? Peter Thiel Ignites a Geopolitical Debate

Episode Date: April 9, 2021

Peter Thiel is nothing if not good at igniting controversy. For the last 24 hours or so, Bitcoin Twitter (and really, FinTwit and TechTwit and Politics Twitter as well) have been hotly debating his assertion in recent remarks that bitcoin had become a “Chinese financial weapon.” In today’s episode, NLW breaks down: The debate around Thiel’s comments  Why bitcoin is more likely a threat to Chinese aspirations around the digital yuan’s future status as a global currency than the U.S. dollar Why digital dollars like tether and USDC might make this whole debate moot from the get-go -- 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

My read is that Peter Thiel thinks that China recognizes themselves as locked in a series of existential geopolitical battles with the U.S., much more than the U.S. sees the inverse. This is because we are currently in the catbird seat, the leadership role. We are the incumbent who doesn't realize they're being competed with until they've actually been disrupted. China is long anything that disrupts dollar dominance. 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.com. And produced and distributed by CoinDes. What's going on, guys? It is Thursday, April 8th. And today we have a juicy one. We are talking about a question brought up by Peter Thiel yesterday. Is Bitcoin a Chinese financial weapon? So some days, I'll be honest, it's a bit of,

of a struggle figuring out what to dedicate a show to. That's less so in the bull markets, certainly a little bit more in the bear markets. Other days, there's some big news that makes it obvious. The most interesting days, however, are when it's not a big news item, but a big community discussion that drives the day's content. So when I saw headlines last night coming out saying that Peter Thiel, a stalwart supporter of Bitcoin, had said that Bitcoin was a weapon of the Chinese government, and that because of that, the U.S. government should be asking more questions about how that works. Oh boy, did I know that this was going to be today's topic. I want to have this conversation in three parts. First, I want to look at interpretations of what Theel actually said. Second, I want to look at

the specific idea of Bitcoin as a weapon for the Chinese government. And third, I want to look more broadly at the geopolitical, geostrategic battle around the world's reserve currency. As I've said innumerable times, this is a show about power and shifts in power. So this should be a fun one. Part one, what deal actually said. Now, I will be honest, the parsing and pinching trying to argue what a specific person meant when they said something is actually sort of the least interesting part of this discussion to me. I'm much more fascinated in the broader conversation it brings up. However, there are a lot of people on all sides of this discussion trying to lay claim to the statement itself, so let's look at that first. And before we get into interpretations, let's actually

listen to what he said. From China's point of view, they want to get, um, they don't like the U.S. having this reserve currency because it gives us, you know, a lot of leverage over, you know, Iranian oil supply chains and all sorts of things like that. They like, they don't want the Rumi to become a reserve currency because then you have to open your capital account and you have to do all sorts of things that they really don't want to do. You know, I think the euro you could think of as, you know, was in part a Chinese weapon against the dollar. It didn't, in the last decade, it hasn't quite worked out that way, but that was, you know, China would have liked to see two reserve currencies like the euro. And, you know, even though I'm sort of a pro-cropto, pro-bitcoin

maximalist person, I do wonder whether at this point Bitcoin is also, should also be thought in part of as a Chinese financial weapon against the U.S. where it's, it is, it threatens fiat money, but it especially threatens the, the U.S. dollar. And China wants to do things to weaken it. So it's sort of China is long Bitcoin and perhaps from a geopolitical perspective, the U.S. should be a little bit, be asking some tougher questions about exactly how that works. But some internal stable coin in China, I mean, that's not a real cryptocurrency. That's just some sort of totalitarian measuring device. All right. So how are people interpreting this? Well, the first is the most literal interpretation.

This was embodied in the Bloomberg headline that made many people notice the story in the first place. Thiel scorns Bitcoin as Chinese financial weapon in about-face. Pretty serious words, he's scorning Bitcoin and this is a big about-face for him. The article claimed that Thiel was urging the U.S. government to consider tighter regulations on cryptocurrencies. Demetri Kofina's host of hidden forces also took a more literal view, saying, maybe he's saying that integration of Bitcoin into the U.S. financial system makes both the U.S. and Bitcoin vulnerable, since China is incentivized to attack it at a future date, and that regulators need to be asking some hard questions about the prudence of such a move. So that is one take. It takes what Peter said at face value.

What about other interpretations? Another point of view is that he was saying that the U.S. actually needs to get more involved in Bitcoin, lest it fall into the hands of the Chinese as a powerful asset. In other words, in this interpretation, Thiel's statement was an affirmation of the power of Bitcoin and a call for U.S. engagement, not a condemnation or dismissal of it. Alex Gladstein from the Human Rights Foundation put it this way. Quote, he is saying Bitcoin is important and we shouldn't fall behind to communist China. The fact that he says he's a Bitcoin maximalist is the signal in that clip. The rest is noise, though I would dispute that the CCP is, quote, long Bitcoin.

Suu, I think, said it even more crisply. Thiel is pointing out to the nation's elite that, far from being tulips or a speculative mania, Bitcoin has geopolitical and civilizational significance and will be pivotal in the rise and fall of fortunes and empires. Now, a sort of extension of this theory, this interpretation, looks at Thiel's interest in memetics. In this version of the interpretation, not only is Thiel saying that the U.S. should be more engaged with Bitcoin, he's deliberately using tactics designed to provoke the U.S. to do just that. We'll call this the 4D chess argument. Chow Wang put it like this.

Stop shitting on Peter Thiel. He's playing the 4D chess trying to get U.S. politicians interested in Bitcoin and ultimately, the U.S. government and Federal Reserve, to accumulate Bitcoin. Bitcoin. Galaxy brain stuff. Remember, Thiel wrote zero to one and is a huge fan of memetic theory. The best way to convince someone to do something is tell them their biggest competitor is already doing that thing. A lot of people subscribe to this theory, which makes sense because A, it does the best to support our priors on Bitcoin, and B, frankly, it does sort of fit with Thiel's background. I mean, listen, at the beginning of the clip, he literally calls himself a pro-crypto pro-Bitcoin maximalist person. But let's even go farther than that. Let's listen.

listen now to how he describes his take on Bitcoin on an episode of the podcast unpacking impact from my old friend Neveen Thucarum. Probably the one asset that I most strongly believe in. As an investor, you often want to find things that are so stupid that other investors are embarrassed to invest in them. And so, for example, the Fang stocks were an instance of a stupid asset that was the really big tech stocks. It was just Jim Kramer came up with a Fang acronym on Mad Money in 2014.

If you just followed his advice, you had made eight times your money in the last six years. You've done better than any venture capital. It was too stupid in a way. And so my candidate for the investment that is so big and so stupid that professional money managers are embarrassed to do it because it suggests they're not doing enough work, is to just buy Bitcoin. We have a strange monetary experiment. Maybe you should be long gold, but gold is still the old economy asset. And probably it's Bitcoin more than gold and nobody's in that one. So that would be my bullish advice, although maybe it's also bearish on a lot of stuff implicitly.

This is a guy who's saying that Bitcoin is his most core investment belief. Does it seem likely that he has in the three months since that was recorded in January, truly done in about face like the Bloomberg headline claimed? For what it's worth, that headline was later updated to Peter Thiel calls Bitcoin a Chinese financial weapon at Virtual Roundtable, quite a bit difference from the word scorn Bitcoin and about face. So it seems that someone at Bloomberg didn't totally agree with the initial representation. I think the issue here and the reason why there is so much debate is two lines in the Thiel

statement. The first is the maddeningly vague, quote, if China's long Bitcoin, perhaps from a geopolitical perspective, the U.S. should be asking some tougher questions about exactly how that works. The key part here is tougher questions about exactly how that works. Bloomberg sees that as he's saying that the U.S. should regulate Bitcoin more. Dimitri is seeing that as saying the U.S. shouldn't integrate Bitcoin into the financial system. Bitcoiners, by and large, are seeing this as Thiel saying the U.S. shouldn't seed ground to China on BTC. All of those interpretations based strictly on the quote itself, tougher questions about exactly how that works are legitimate interpretations.

And this gets back to the reason why I said this is the least interesting part of the conversation. If I had Peter Thiel here on the show, I could clear it up in a second, but the interview didn't do that, so ultimately we're just going to speak around one another. The second line that is in question is the jarring nature of the phrase Chinese financial weapon, and this seems like it is even clearer. However, when you listen to the full clip, there is additional context. He also calls the Euro a Chinese financial weapon. What's more, if you listen to that full interview from January on unpacking impact, he uses the exact same phrase Chinese financial weapon to describe artificial intelligence technology, which brings me to my interpretation. I think the jarringness of the phrase Chinese financial weapon is a specific choice.

I think it's a choice that's meant to dramatize the point of how China views things in relation to the U.S. My read is that Peter Thiel thinks that China recognizes themselves as locked in a series of existential geopolitical battles with the U.S. much more than the U.S. sees the inverse. This is because we are currently in the catbird seat, the leadership role. We are the incumbent who doesn't realize they're being competed with until they've actually been. disrupted. At least, that's a way of looking at these comments and, frankly, many of Theel's political actions over the last half decade or so that makes them all have a certain type of sense. When it comes to these specific comments, here's how I put it on Twitter. China is long

anything that disrupts dollar dominance. To me, this point is inescapably clear from the context of him also calling the euro a Chinese financial weapon. And this is the point at which I'd like to leave speculation about what Peter meant to move to the broader relevance of the discussion. Looking for the best way to unlock your crypto's liquidity, nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12%, and swap between more than 75 market pairs with the instant nexo exchange. Try the Nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Hey guys, I'm excited to share that this week we have a special product launch sponsor.

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it represents the dollar. The second is the larger battle for global financial supremacy that undergirds that specific conversation. The core of the idea of Bitcoin is a financial weapon for the Chinese is in the line, quote, it threatens fiat money, but it especially threatens the U.S. dollar. Why would Bitcoin threaten the U.S. dollar more than, say, the euro or the Chinese R&B? In short, it's because the U.S.D. is the global reserve currency. It, theoretically, has the farthest to fall. In a world where there was a mass and equivalent shift from fiat's to Bitcoin, a digitally native reserve asset and settlement

currency, it would, by extension, proportionally impact the U.S. dollar more. However, that's not what we've seen so far. Bitcoin so far has shown itself to be a threat primarily to weak monetary regimes. In places like Venezuela, Argentina, or Turkey, where money can and does lose 10% of its value overnight, there is an extraordinary incentive to opt out of that local monetary regime and into an alternative. Bitcoin is ready and waiting because of liquidity, infrastructure, and permissionless on-ramps. However, it remains undisputedly the case that in every one of those places, U.S. dollars are today the preferred off-ramp of choice out of the local monetary system. Argentina's blue markets, for example, are all about getting people dollars, and they are much

bigger proportionally than Bitcoin. The point is, the type of settings and environments around the world that drive people to Bitcoin as an actual fiat alternative are still benefiting the dollar more than they're benefiting Bitcoin. This won't be the case forever, but it is certainly the case now. What about the notion of China's control over Bitcoin or China being long Bitcoin. I will note that Thiel said nothing about nor even implied Chinese control of Bitcoin. This is an old fud picked up by some who wanted to hear that in its statements. The Canard focuses on the percentage of Bitcoin mining controlled by Chinese mining pools. There are a lot of issues to bring up with this, and frankly, it probably deserves its own show.

In fact, I'm almost definitely going to have to, given that it dovetails with ESG concerns around Bitcoin that seem like they're going to get more prominent. Kevin O'Leary from Shark Tank said yesterday that he'll only buy Bitcoin mine sustainably rather than, quote, blood coin from China. However, for the purposes of today's show, the major refutation point that I want to make that I think is most salient has to do with perceptions of power in the Bitcoin network. There is a sense among laypeople that power in Bitcoin lies with the miners, accumulate enough hash power, and you can attack the network and take control. Technically, that's right. What it fails to recognize, however, is that true power in Bitcoin lies in the social consensus,

a social consensus that is embedded in the nodes that run the protocol. This, more than anything else, was the lesson of the block-sized wars. Game this out. If a conglomerate of Chinese state-controlled miners assaulted the network, what do you think would happen? Bitcoin would almost assuredly forked to a new chain. Let's, for our purposes, call it Bitcoin Fuck China, or BFC for short. Almost immediately, on mass, nodes would switch. Miners not under the control of the Chinese state would also move over and we'd all move on with our lives. Now, would this be messy? Absolutely. This is a meaningful tail risk that people have to think about,

and certainly companies who are investing in Bitcoin need to price it in. I'm reminded when I think about this of Travis Kling's epic rant on this show from a few months ago about the fact that what you do with risk is not throw the baby out with the bathwater, you price in the possibility that you think it actually has. But my point is that would this be existential? No, because power does not lie ultimately with miners. It lies with the social consensus of what the true Bitcoin network is. There is no reason to think that the network effect that has adopted this Bitcoin versus all of the other forks that have come along would somehow accede to a Chinese-controlled version of it that was blatantly attacked to make it so. Meanwhile, let's shift the question and ask whether

there are reasons for China not to be long Bitcoin, but in fact to be absolutely terrified of it. Certainly, the degree to which they've tried to control it, for example, banning exchanges suggest not a long Bitcoin position, but a terrified of Bitcoin position. Why would that be the case? The Chinese financial system is increasingly a tool of social control for the CCP. One of the really important trends in China over the last few years has been an increasing discomfort on the part of the state, with the share of financial activity taking place in fintech firms like AliPay and WeChat Pay, as compared to the banks which are state-run. Sure, China has surveillance and visibility into those apps, but not nearly to the same degree as a pure state

institution. This, more than anything else, was why China stepped in and put a stop to the Ant Group IPO a few months ago. What followed was two months of China asserting power in the form of a total reorganization of Ant, which gave the Chinese state a hell of a lot more control. For those in China who wish not to be surveilled, Bitcoin represents a pretty powerful opt-out. And by the way, it seems like the number who wish not to be surveilled is growing. Cash supply and use in China, cash of course being the most untraceable of all months, but monies was up 10% last year. This, I believe, is also a key part of their push for the digital yuan. The digital yuan has two major functions. One is external, one is internal. The internal

function is to fully subsume the power of fintech money under state authority. They're bringing all of the other apps into the digital yuan system, because if you have perfect visibility into the actual digital bearer instrument running through the system, doesn't matter which app they're being used through. It puts things that were outside their purview inside their purview. Now, the external function gets back to the heart of this conversation. The digital yuan is one of the chief tools in China's arsenal as they see it to get around the US dollar-led global financial system. And to use just one statistic to dramatize the Chinese situation. Chinese goods represent a little over 12% of global trade, which is more than anyone else, including the U.S. China's currency,

meanwhile, represents just 2% of global foreign exchange reserves. In other words, people like China's goods, they don't like China's money. It is and has been a major strategic a comparative to internationalize the RMB, and that is what the digital yuan is all about. This is also, not for nothing, a big part of what the Belt and Road initiative was about. Create an economic sphere of influence and then create the perfect global digital currency for it. Keep in mind, part of why digital currencies are appealing to central banks, outside, of course, of the surveillance that China is no doubt thrilled about, is how much better they function than fiat. Instantaneous settlement of a digital bearer instrument is vastly superior from the standpoint of time and risk than the settlement systems of

today. The Chinese bet seems to be that there are many who might be willing to cast aside the lumbering dollars in its laborious swift payment rails for something more technologically advanced, and their play is to grab first-mover advantage. This gets me back to my central thesis, which is, viewed from the lens of the competition to retain or gain global currency reserve status, Bitcoin and China are both competitors to dollar dominance. In that, I believe Bitcoin is as much, if not more, a threat to China's efforts than to the U.S. If China is saying, hey, look how much nicer it is to transact with this digital bearer instrument that settles instantaneously and finally, and in fact is hoping that the benefits

of that get some people who don't love the idea of messing around with Chinese currency to get over their concern, how many of those people are going to look over to Bitcoin? A neutral, non-politically compromised, less-surveailable version of that exact same thing and go with Chinese digital currency instead of with that neutral alternative. maybe an even more pertinent question to ask in the short term. How many of those same people are going to look over at Tether or USDC and see something that has the unit of account of the system they already know and trust, with that stability of value, and the same properties of instantaneous settlement and finality, and just choose that instead? There is a huge X-factor missing from the entire conversation of Thiel, Bitcoin, the U.S. and China,

which is the digital dollar approximations that are already running around becoming U.S. World Reserve Currency 2.0. It almost doesn't matter how slow the Fed moves on a U.S. digital dollar when there are already, for all intents and purposes, functionally equivalent digital dollars that are permissionless and ready to use today. Perhaps that is a story for another time. For now, let's just briefly recap. I think Theo was arguing that China is long anything that undercuts the dollar. I think he thinks that U.S.D has more to lose from Bitcoin than China does because USD is the leader. I think the ought to think about how that works line is more likely to refer to the US getting involved with Bitcoin than the US regulating in a way, but ultimately that's

just speculation. I think that China has a lot more to lose from Bitcoin than the US does. And finally, I think, and I think this will be its own show, that US stable coins and eventually a Fed coin could extend the hegemony of the dollar as the world's reserve currency for another generation. Hoo! And there's the show. All right, we did it. We talked through the deal idea that everyone has been talking about for the last 24 hours. And now, tell me what you think. Super interested. I actually think this is a massively important conversation. Dimitri from Hidden Forces and I were talking back and forth a little bit. And I think the thing that we definitely agreed on,

despite anything else that we might not have, is that this is an important conversation to have. And frankly, this is exactly why I love doing this show. It is about power. And in this world, the world that we're in and the world that we're moving into, you have to consider Bitcoin as a part of that power. And if anything, that's what Peter Thiel was saying. Like his implications or not. Until tomorrow, guys, be safe and take care of each other. Peace.